Investment risk should be as simple as counting to five, ACA chief says

Peter Kell, head of the Australian Consumers’ Association (ACA), has called on the regulator and manufacturers to apply a risk rating system to financial products.

Kell, speaking last week at the Australian Securities and Investments Commission (ASIC) ‘Summer School’, said households are beginning to act as the “risk-takers of last resort” in financial markets but don’t necessarily understand the implications of this trend. He said ASIC and product manufacturers should consider adding a risk indicator on a scale of 1 to 5 to each financial product as a way of helping consumers understand the risks associated with investing. “People don’t naturally have an understanding and estimation of risks,” Kell said. “[For example] Reverse mortgages will become important and the challenge is will those products be easy to understand?” Kell, former ASIC director of consumer protection, also told the Summer School attendees that disclosure by itself does not protect retail investors because many do not understand the language used by product manufacturers to describe financial risk. In the same session Professor Geof Stapledon, managing director of ISS Australia and Professor of Law at Melbourne University, said that “lengthy and complex” product disclosure statements and prospectuses often acted as a barrier to understanding for consumers of financial products. Stapleton said product manufacturers often design disclosure statements to protect themselves rather than clearly inform investors of the risks involved. “Disclosure of key facts should not be buried deep into the document and spin on related party transactions which could give rise to conflicts of interests are areas about which investors need to be wary,” Stapledon said.