Disclosures – a Genuine and Generational Opportunity

The UK’s decision to leave the European Union was monumental and we are still coming to terms with the impact of it. What has become clear since we left is that, regardless of one’s views on that decision, there are very real opportunities for the reform of retail financial services, given that a large proportion of the rules which govern this sector have been on-shored from EU derived law.

Since 2016 we, along with many in the industry, have felt some frustration with what we considered to be an absence of vision about what the UK’s post Brexit financial services system looked like. The announcement of the Edinburgh Reforms addressed this frustration, with the government setting out an ambitious vision for where radical changes could be made in the system.

Six months on from this announcement, some of these concerns have returned. In the intervening period we have had a number of interesting discussion papers suggesting a desire to make radical change and our overwhelming feeling is that these discussion papers have focused on looking for problems rather than setting out clear proposals for reform.

One of the areas where problems were well known and understood was our disclosure regime. The demise of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regime, which PIMFA has been critical of since it came into effect, is greatly welcome, albeit with the caveat that it still unclear what will replace it in the long run. But we strongly believe that there is a greater prize to be won here: wholesale reform of the disclosures regime, which needs to be considerably simplified.

We need to return to first principles to truly come to a conclusion of what disclosure is really for. If it’s to engage the client, then we need to design a regime which is ultimately rooted in that principle. If we want to educate the client, the same principle applies. What we cannot do is look to design a new disclosure framework which seeks to be all things to all people. If we do this, we run the risk of reinventing the PRIIPs regime, not improving it.

PRIIPs was overly complex and confusing, comparing the characteristics of a vast range of products through a single document. The complexity of KIDs, and the language used within them, had a negative impact on retail investor sentiment, putting investors off buying certain investment products, particularly retail bonds.

We believe that in reforming our disclosure regime, there should be six building blocks that government and the regulator should consider and build a regime around. We need to:

1. Recognise low levels of consumer engagement and financial literacy in the UK
2. Focus disclosure information on mass market products
3. Take advised businesses out of a future disclosure regime
4. Develop “headline” disclosures that use straightforward language
5. Launch a broad review of all retail disclosure rules
6. Create a central retail disclosure sourcebook in the FCA Handbook

Whilst the government’s vision on the Edinburgh Reforms is to be applauded, one is entitled to be sceptical about the possibility for radical change given the breadth of proposed reform, the timelines envisioned and, crucially, their action to date. Looking again at the provision of financial information to consumers is the one area where wholesale reform is not only needed but presents policymakers with a genuine and generational opportunity to engage with and empower more people.

The Government and the FCA must engage with industry on this issue as we work to create the culture of saving and investing in the UK which we all want to see.