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Disclosure ‘not the silver bullet’ for consumer protection

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Charbel Kadib 4 minute read

ASIC has released a new report into the effectiveness of financial product disclosure, in which it has sought to debunk the “myth” that disclosure “sufficiently” protects consumers from financial harm.

The Australian Securities and Investments Commission (ASIC) has published new research in conjunction with the Dutch Authority for the Financial Markets (AFM), in which it has examined the effectiveness of mandatory disclosure for financial products on consumer outcomes.

The report contains case studies from across a broad range of financial products and services in Australia, the Netherlands, the UK and the US.

ASIC has found that the reliance on mandated disclosure and warnings has “often proved ineffective” and, on some occasions, has “contributed to more consumer harm”.

Key findings of the report include:

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  • Disclosure does not 'solve' the complexity in financial services markets;
  • Disclosure must compete for consumer attention and influence;
  • One size disclosure does not fit all – the effects of disclosure are different from person-to-person and situation-to-situation;
  • Disclosures can backfire by creating unintended detrimental outcomes for some consumers; and
  • Product warnings can be ineffective in dissuading consumers from purchasing unsuitable products.

Reflecting on the findings, ASIC deputy chair Karen Chester said: “It's time to 'call time' on disclosure as the default consumer protection.  

“It's not the 'silver bullet' once thought, nor should it be relied upon as one. Disclosure can and has backfired in unexpected and harmful ways.”

Ms Chester said that an over reliance on disclosure partly contributed to the poor consumer outcomes identified throughout the banking royal commission.

“Importantly, the royal commission represents more than a tilt away from disclosure,” she said.

“The overwhelming majority of the commission's recommendations – over 50 – are about better firm conduct.”

Ms Chester claimed that the research highlights the need to “rebalance the onus from consumers to firms”. 

“To do this, firms need to understand, measure and deliver on consumer outcomes,” she said.

“This aligns with the royal commission and the ensuing legislative reform program the government has underway.”

According to ASIC, the research also reveals that firms can work around and undermine disclosure obligations with “unnecessary product complexity” and “sludge” that can prevent consumers from switching products or making complaints.

ASIC made reference to a case study that found that two-thirds of Australian consumers given a 'simple' key fact sheet (KFS) selected the “objectively best home insurance product”, while almost three-fifths of consumers given the KFS or longer product disclosure statement selected “suboptimal products”.

“Put simply, disclosure has been asked to do too much,” Ms Chester continued.

“It cannot solve the complexity of the financial system. Especially when that complexity, in the form of thousands of barely differentiated products, is firm induced.”

ASIC claimed that its research has provided it with further impetus to exercise its product intervention powers.

“Ideally this report will be a must read for corporate Australia, especially financial firms with near term design and distribution obligations,” Ms Chester said.

“These obligations have real potential to be a game changer for both firms and consumers. Firms meeting these obligations will also restore trust where they design and offer products and services that deliver value, not surprises, and are sold fairly.”

Ms Chester added: “Recent sunlight has demonstrated this is not only in the consumer’s best interests, but ultimately in the interests of firms that want to be consumer centric and better manage their non-financial risks.”

Despite identifying gaps within existing disclosure practices, the ASIC deputy chair noted that mandated disclosure “still has an important role to play”. 

“The evidence shows that it is necessary but not sufficient,” Ms Chester concluded.

[Related: ASIC issues notice to AFSL holders]

Disclosure ‘not the silver bullet’ for consumer protection
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Charbel Kadib

Charbel Kadib

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

Before joining Momentum Media as a journalist in 2017, Charbel held roles with public relations agency Fifty Acres, and the Department of Communications and the Arts. 

Email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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