Time to bulldoze the FCA's disclosure rules?

The motor finance Supreme Court case is fundamentally about disclosure. Meanwhile, the FCA is reassessing some of its own disclosure rules. There’s a tension between hard-and-fast disclosure rules and the Consumer Duty.

Over the last two years, we’ve seen the way that the Duty raises the bar for customer communications. Customer communications which were previously deemed compliant with the old prescriptive disclosure rules have been overhauled in order to achieve consumer understanding.

In this context, the regulator thinks it might be able to loosen some of the prescriptive disclosure rules, such as the summary box for savings accounts.

When do prescriptive disclosure rules help consumers?

• Standardisation can help consumers compare products. Once consumers understand the meaning of a certain prescribed disclosure, then each occurrence of that disclosure will be easy to understand. Easier comparison should increase competition.

• Standardisation can be easier to supervise. The regulator may find that it is less resource-intensive to check that firms are complying with the prescriptive disclosure rules, especially in markets with a large number of firms. To some extent, we would expect consumers to benefit from more efficient regulatory oversight. For example, through regulatory resources being more productively deployed on other tasks.

• Standardisation can help organisations like Fairer Finance compare products for consumers. Some level of standardisation is helpful for organisations like us to rapidly review the market and support informed consumer decision-making.

• Prescribed disclosure can deliver tough messages. If the regulator is worried about firms ‘pulling their punches’ in delivering information to customers, then prescriptive disclosure rules can be useful as there is less room for manoeuvre. For example, the prescribed disclosure around trading contracts for difference. However, the regulator could also use the Duty to force firms to deliver tough messages. This is because the Consumer Duty raised the bar for evidencing that consumers are making informed decisions.

When do prescriptive disclosure rules not help consumers?

• Standardisation can hide important variation from consumers. Standardisation is only helpful for consumers if the underlying facts are the same, across providers. For example, the level of investment risk varies across different investments, funds, and investment providers. Standardisation on disclosing ‘capital at risk’ hides this variation in underlying risk.

• In practice, standardisation may not promote shopping around. Prescribed disclosure rules may not take account of how consumers compare providers in practice. For example, if consumers only see the IPID towards the end of their insurance purchase journey, they are unlikely to shop around and compare IPIDs.

• Prescription can hinder innovation. Prescriptive disclosure rules hinder firms from implementing more effective ways of communicating with their customers. For example, in the retirement wake up pack, the firm must present the retirement risk warnings on no more than a single side of A4 paper. While this rule may have been drafted with good intentions... the end result is often not conducive to ensuring that consumers engage with the information or actually understand any of the key risks. Many of the existing prescribed disclosure rules were drafted before smartphones were commonplace.

Now is the time for the FCA to remove the ineffective (or even harmful) existing prescriptive disclosure rules

The FCA can better mitigate information asymmetry and behavioural consumers through a combination of enforcing the Consumer Duty, and through replacing the existing prescriptive disclosure rules with higher level disclosure requirements. This is outcomes-based regulation.

For example, instead of mandating the exact format of pre-contractual credit information, the FCA could instead require firms to disclose the most important information.[1] Providers would then be left to choose the most effective format and wording.

Exactly how this is disclosed to the customer would be up to the firm – as long as the firm could provide the evidence to demonstrate that the disclosure is achieving genuine consumer understanding.

This approach to disclosure might foster greater innovation and competition and therefore (whisper it) support economic growth.

The FCA should judge prescriptive disclosure rules on a case-by-case basis

• The FCA should proactively supervise and enforce the ‘consumer understanding’ outcome of the Consumer Duty.

• The FCA should retain prescriptive disclosure rules where these are net positive for consumers. The FCA should consider which consumers benefit (and which don't) when assessing this... e.g. the effect of the rule on consumers with characteristics of vulnerability.

• Where prescriptive disclosure rules are not good for consumers, the FCA should replace them with higher level (i.e. less prescriptive) disclosure requirements.

[1] The results of some consumer testing on pre-contractual credit information can be found here: https://www.fairerfinance.com/insights/research-reports/improving-disclosure-in-the-consumer-credit-market