Disclosure is an ever-increasing component of regulators’ armouries. And transparency is important because it helps build investors’ trust in products and in the firms that manage their money while hopefully helping them make better decisions, writes Andy Pettit, director of policy research for Emea at Morningstar.
With product providers having to pack more information in to existing and new documents, investors have access to more information than ever, but it is as likely to intimidate as to engage them – Information is difficult to find, spread across multiple documents, most of which are not in a standardised format; language is often legalistic or industry jargon; and metrics can be difficult to interpret or compare.
Many have tried
Clearly, presenting and delivering the right content to engage, protect and help investors is not an easy challenge, evidenced in part by the high profile, contentious and protracted journey of the EU’s PRIIPs Key Information Document (KID).
The PRIIPs’ goal was to improve the transparency and comparability of investment products across the EU and after several false starts and a series of tweaks to the requirements, UCITS have this year had to join the disparate range of other retail investment products in having to publish a KID.
However, PRIIPs remains some way short of achieving its goal, undone by a combination of factors. Sections of the document suffer from a lowest common denominator approach due to forcing comparisons of UCITS with corporate bonds, unit-linked insurance products and structured products.
Adding complex future performance scenarios introduced confusion. Blending market and credit risk into a single indicator was not intuitive. And a series of small concessions didn’t create material improvement.
Some have had successes
However, hope springs from a few quarters.
The European Supervisory Authorities are aware of the shortcomings and recommended significant changes to the Commission to make the KID simpler and more user-friendly, including greater use of digital disclosure and the concept of layering – providing clear access to the most important information, with onward signposting to more details for those who want it.
If and what changes emerge in the Retail Investment Strategy remains to be seen.
More definitive change is on the horizon in the US, where the Securities and Exchange Commission (SEC) is rolling out rule amendments to make shareholder reports more concise and visually engaging shareholder reports, highlighting key information that is particularly important for retail investors to assess and monitor their fund investments.
Notably, the US, has been graded the leader in disclosure best practices in every edition of Morningstar’s Global Investor Experience Study. Conducted bi-annually since 2009, the research considers disclosure practices across 27 markets and the SEC is not resting on its laurels.
Thirdly, and perhaps the most exciting, comes with the in-progress repeal of PRIIPs in the UK. Unlike the incremental piecemeal approaches to change that regulatory environments usually demand, the Treasury and Financial Conduct Authority (FCA) are creating real potential for a once in a generation opportunity to create a truly cohesive framework that gets decision-useful information to investors in an engaging, understandable and easy to consume manner.
Technology is an enabler
The potential is huge. Products provide a lot of information across multiple documents. Better online indexing would make it easier for investors to find the information they want and reduce duplication. Discipline about what is the most ‘key’ information can make disclosures easier to digest. Comparability of that information across similar products can aid investors decision-making.
Flexibility in how firms present the required information can engender more innovation than a point-in-time proscribed format. More graphical representation and less text can increase engagement. Combining elements of cost, performance, portfolio holdings and risk together can provide more context than looking at each in isolation. Risk disclosure can benefit from a standard taxonomy of principal risks with only material risks being listed.
On top of this, environmental, social, governance and stewardship disclosure in particular is still in its infancy and exemplifies the need for frameworks that can evolve and respond more quickly than in the past.
Its important that as opportunities for change present themselves, we are ready as an industry to input the ideas that put Investor needs front and centre of future disclosure frameworks.
Advisers insights about the aspects that will benefit their clients most should be particularly valuable.
This article was written for International Adviser by Andy Pettit, director of policy research for Emea at Morningstar.
