It's time to rethink disclosure

Disclosing information to customers is a part of financial services DNA and, to this end, laws such as the NCCP set down the type of disclosure required to promote optimal consumer outcomes.

Yet the FSI report also states that "the current disclosure regime produces lengthy and complex documents that often do not enhance consumer understanding of financial products and services". This refers to what I've termed the 'disclosure paradox'. In a well-meaning attempt to increase consumer protection, increased disclosure leads to larger and more complex disclosure; this in turn often means that consumers are intimidated, read less of the disclosure and therefore comprehend less.

Disclosure of itself doesn't necessarily lead to understanding. Understanding requires comprehension, and disclosure and comprehension are not synonymous.

If you don't believe me, have a glance at a thesaurus. Search for disclosure and you will find words and concepts like admission, publication and declaration. Search for comprehension and you'll find such things as awareness, intelligence and knowledge.

Disclosure is something given by another, external to an individual; whilst comprehension is something gained, intrinsic to an individual. A big difference!

I can hear the hue and cry. "Disclosure presents the truth if it is presented in a clear and lawful manner!"

If it is disclosed that 5+5=10, this is an unambiguous truth, not subject to interpretation and capable of being readily understood by all with a basic level of numeracy, which most consumers would possess and which financial services providers are probably entitled to assume that they posses.

However, if it is disclosed that E=mc2, this too is held to be an unambiguous truth. It is not apparent from this simple-looking equation that it took history's most famous physicist, Albert Einstein, many years of intense work involving complex mathematical concepts to derive the theory of relativity. E=mc2 has the same number of symbols as 5+5=10 – but there is a quantum leap of complexity between the two.

An apparently simple equation that goes to the core of the very existence of the universe may have been "clearly and lawfully" disclosed, but other than to an elite few well-versed in theoretical physics, the meaning of the equation is unlikely to be well comprehended.

We are living in a crisis of complexity, and most financial services transactions are conducted in an atmosphere of heightened emotion. To gain an outcome, most consumers will declare that they know or will pretend that they know the meaning of information that is being disclosed. Reliance on a legalistic approach to disclosure is grossly inadequate in achieving optimal consumer outcomes.

To genuinely protect consumers, it is critically important that financial services providers make sure that consumers truly comprehend what is being disclosed to them. To do this in the future, it is very likely that measurement of comprehension will be necessary to accompany disclosure.
As Einstein also famously commented, information is not knowledge.

Comprehension without disclosure is lame; disclosure without comprehension is blind.