One of the key themes to emerge from the Financial System Inquiry interim report is that product disclosure – both in banking and superannuation – isn’t working.
Few in the superannuation industry would disagree. All of us are acutely aware that very few super fund members read the fine print and – frankly – who could blame them. Too often disclosure is about compliance and ticking a box rather than thinking about how the information is received by the end-user.
In questioning the assumptions of the previous Wallis Inquiry – which recommended a regulatory framework that relied heavily on mandatory disclosure- David Murray and his panel have noted disclosure often does nothing to enhance consumer understanding of financial products and services, while at the same time, imposes significant costs on industry participants. The FSI panel also recognises that while financial literacy strategies are important, alone they are not sufficient to ensure adequate consumer outcomes.
The FSI Panel has suggested that a new approach is needed. This might be facilitating new ways of providing information to consumers using technology and electronic delivery and/or subjecting product issuers to targeted regulation of product features.
There can be no doubt that technology has a greater role to play. You don’t have to be Mark Zuckerburg to recognise the potential for Apps or websites with clever and interactive infographics to make disclosure more appealing and meaningful.
There is also a need to put more emphasis on design and consumer testing. Can you imagine Coca-Cola or McDonalds disclosing new information to their consumers without having first consulted an expert team of designers and extensively road-tested the concept? Yet this is precisely how parts of the Stronger Super disclosure framework were rolled out to super fund members. Driven by tight legislative deadlines, regulators had little time or resources to conduct adequate consumer testing. This has led to disclosure requirements that some in the industry fear are actually making consumers more confused.
Disclosure, of course, is not just about informing consumers. Ensuring that commercial product issuers are transparent and open about fees and costs is vital to driving competition and industry best practice. But, again, it can backfire.
Earlier this year at a super industry roundtable discussion organised by ASIC to examine fee and cost disclosure in superannuation, participants with decades of super industry experience struggled to explain the differences in fees and costs ‘disclosed’ in several super products. Key issues identified included a lack of disclosure by some funds of fees and costs associated with underlying investments and the practice of deliberate fee gaming – whereby some commercial operators are effectively under-disclosing fees to gain a competitive edge.
In a recent and welcome development, ASIC has moved to further strengthen fee disclosure to ensure consistency and transparency of approach across all products and sectors of the industry. However, as the FSI Panel has correctly identified, the challenge remains to ensure that any added layer of disclosure is meaningful for consumers.
We mustn’t give up on disclosure, but we must get it right. The FSI’s final recommendations to enhance the current disclosure framework have the potential to produce a very worthy legacy for David Murray and his panel in safeguarding consumer interests. But let’s test any new ideas carefully with members first – it’s their money after all.