Disclosure-based regulation has failed

The investment regulator was sent a clear message at the 2008 ASIC Summer School conference in Melbourne: disclosure-based regulation has failed.

Speakers at the conference argued financial planners are being buried in paperwork in the name of disclosure and called on the Federal Government to consider the “stratification” of different types of financial products and services.

They also stressed the need for greater distinc­tion between general and personal advice as a means of reducing both cost and complexity for those in the business of handing out advice.

Jeremy Cooper, deputy chairman of the Aus­tralian Securities and Investments Commission (ASIC), admits that 46 per cent of the popula­tion cannot read well enough to understand the information disclosed to investors around financial advice.

He says ASIC is considering ways to facilitate more online participation in financial services, and reduce the compliance burden on planners.

“Financial services consumption is too paper-based, we need more online disclosure,” he told the conference.

However, Peter Kell, CEO of Choice, says more disclosure is not the answer.

“Even if we throw more information at people, poor decisions will still be made due to people’s inherent biases,” Kell says.

“The question is: what are the problems in financial services that disclosure can fix, and what are the problems that require other regulatory tools to deal with [them]? Conflict of interest is an issue which disclosure is not particularly good at ad­dressing, which is leading to suboptimal decisions.”

Nicholas Gruen, chief executive officer of Lat­eral Economics, says markets “require [disclosure] at some level”. However, there is a disconnect in pushing it all the way through to retail investors.

He argues markets deal with complicated infor­mation by looking at the reputations of advisers or distributors.

“Sadly, although we are heading in the direc­tion of reputation, we bury advisers in compliance obligations,” he says.

“A model needs to be designed to give [retail clients] a way of finding those with a good reputa­tion.”

One suggestion from panellists to counter the challenges around disclosure was the introduction of “bedrock” or default financial instruments for consumers who cannot read the disclosure around advice or simply want low-risk investments.

It was considered that risk-rated products would help prevent less savvy investors – such as those burnt by the Westpoint collapse – who might not have access to financial advice, from making poor investment decisions.

Rohan Mead, group managing director of Australian Unity, says a product like the old Com­monwealth bond would be appropriate.

“We need to think about stratification of finan­cial products and services, particularly for those unable to access advice, and force them into market products with lower risk choices,” he told delegates.

“There must be a set of safer waters charted out for people in that situation; products with low risk, such as bank-backed securities, with a lower return trade-off.”

Tony D’Aloisio, chairman of ASIC, told journalists at a media conference that the regulator needed to further examine the issue of “stratifica­tion”.

It was not clear at this stage whether there was a need for certain products to be blacklisted for retail investors, he added.

“It certainly needs more discussion and em­bedded in that is a policy issue – how far do you intervene with financial markets?” D’Aloisio said.

“We don’t want to cut across the innovative way that markets come up with new products. I’d still like to see the investors making choices and taking their own responsibility, but in the areas of the unlisted, unrated markets we have a greater role to play than we do perhaps in the listed markets.”

Sally Herman, general manager of advice at Westpac, says the Federal Government should make a greater distinction between general and personal advice to reduce the complexity and costs in giving advice.

“I’d like to see a wider definition for general advice,” she told delegates.

“There are many players who, for fear of cross­ing into personal advice, pass everything over to the financial adviser, which increases the costs [of providing advice].”