“financial services providers and authorised agents should provide consumers with information on material aspects of the financial product and .. appropriate information should be provided at all stages of the relationship with the customer. ”
— Principle 4, G20 High Level Principles on Financial Consumer Protection (“Disclosure and Transparency”)
The regulatory odyssey
Jane Austen, in her famous expose of the Victorian wealth management industry, wrote that
“it is a truth, universally acknowledged, that all financial promotional material should be accurate, honest, understandable and not misleading”
Understandably, and with the best of motives, standardised pre-contractual disclosure practices (e.g. forms) were recommended to protect consumers and equip them to compare products and services of the same nature. Specific disclosure mechanisms, including possible warnings, were developed to provide information commensurate with complexity and risk of the products and services considered. Where possible, regulators and advisers were encouraged to conduct consumer to improve the effectiveness of the disclosure documents.
If only these prescriptions worked in practice.
How often have you read a disclosure document and were able to understand it?
The siren call of disclosure
In their book “More than you want to know, The Failure of Mandated Disclosure”, Omri Ben-Shahar and Carl Schneider suggest most people find disclosures complex, obscure and dull, suggesting even the most educated consumers were unable to understand half of what the disclosure documents say.
In addition to disclosure documents being “complex, obscure and dull”, a recent joint report by ASIC and AFM observed that firms also make processes strategically “sludgy”. Products easy to get into, but hard to get out of.
As we’ve previously argued, regulators seem to lament the effectiveness of disclosure while celebrating its necessity. In contrast, Ben-Shahar and Schneider suggest mandated disclosure is worse than ineffective, it is destructive. By liberally exploiting their liberal arts education, the authors present disclosure as a Lorelei, luring lawmakers onto the rocks of regulatory failure.
Instead of the usual grudging endorsement, Ben-Shahar and Schneider are scathing about the use of disclosures; mandated disclosure does not does not work, can not be fixed and does more harm than good.
They go on to suggest mandated disclosure is alluring because it is relatively easy to enact, with its ecumenical ideology and apparent modesty, it provokes relatively slight political opposition.
The illusion of regulation
In support, Professor Lauren E Willis observes that disclosure is not regulation as much as it is a fig leaf for not regulating.
Critiquing Ben-Shamar and Schneider’s work, Willis argues that it is not disclosure that is disempowering, but rather the loss of rights; to privacy; to a safe product; to property and that with or without disclosure consumers have been taken.
Willis agrees with Ben-Shamar and Schneider’s position that disclosure alone, whether mandated or not, should not have legal consequences . She also argues that firms should be permitted ‘neither to brandish disclosure as a sword against consulters not to raise disclosure as a shield from liability for unfair, deceptive and abusive conduct’.
Interestingly, in a report prepared by the Productivity Commission in 2006, entitled Rethinking Regulation, one submission argued:
‘Rather than drowning consumers with vast amounts of disclosure, a far better alternative would be to ensure that fundamental protections are built into the legislation itself.’
Interestingly, the recently released ASIC and AFM joint report quotes Ben-Shamar and Schneider and references their commentary regarding the difficulty of making clear and simple disclosure. So many factors affects a ‘well-considered’ choice and the more factors eliminated to simplify disclosure, the greater the risk that something critical has been omitted.
It’s a tension that regulators and advisers often fail to reconcile. Essentially, Ben-Shahar and Schneider assert that mandated disclosure is a regulatory response to the problems of non-specialists facing unfamiliar and complex decisions.
Most consumers, it would be fair to say, ignore most of the disclosure documents presented to them whether it’s the terms and conditions associated with app updates or their mobile phone contracts. Conditioned to the relentless waves of disclosures and disclaimers, consumers surrender. It’s a human, if not entirely logical response to the day to day a proliferation of disclosure documents dealing with borrowing, saving, investing, buying or leasing, shopping for and taking out insurance, informed consent for medical procedures, health warnings, pharmaceutical disclosures, privacy notices, food labels, advertising disclaimers, refund policies and more.
If consumers closely read all the disclosure presented to them each day, they would have little time for anything else.
ASIC and AFM observed in Report 632 that only 20% of consumers read long disclosure documents about financial products.
There may be many reasons for this result but Ben-Shahar and Schneider observe that much of the information that is disclosed is simply sensibly ignored.
People rightly calculate that reading an end-users licence agreement won’t change their minds, and sensibly support that while a disclosure might improve a decision, the improvement is too imperceptible to justify the time and effort. The authors further observe that consumers correctly rely on government and the market to reduce the risks of leaving disclosures unstudied.
Where does this leave us?
Should we throw all disclosures out of the window?
As Ben-Shahar and Schneider reflect, suppose that people really make informed and rational decisions, they want to assemble the relevant information, identify the possible outcomes, and assess those preferences. Even if this were true, and not some conservative-economic fantasy, the authors argue that mandated disclosure fails because it depends on a long chain of fragile links, and only works if lawmakers, disclosers and discloses play demanding parts deftly.
ASIC and the AFM still feel that disclosure has a role to play in retail financial services markets, for contributing to market transactions, integrity and efficiency and acknowledge but they acknowledge that no one regulatory tool can be a cure all for all regulatory problems.
It may be too early to rely on ethics and professionalism, but the research makes a compelling argument that it’s time to explore alternative regulatory tools to improve consumer outcomes and better product design, governance or distribution.