As the new year unfurls, the Financial Conduct Authority moves forward to rewrite its rules with more freedom than pre-Brexit.
The Treasury last month announced its intention to remove the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulations and consult on a new direction for retail disclosure. The regulator’s discussion paper on the topic is asking for comments by 7 March.
I think the problem starts with suitability. As we know, before product disclosure information is produced there needs to be a sale.
The public needs a non-advising and non-profit equivalent of Hargreaves Lansdown
The FCA’s suitability requirements seek to ensure that, where firms provide investment advice or portfolio management services, they obtain enough information about their clients to be able to act properly for them.
I’ve found suitability to be such a subjective issue. Two identical people could end up with different recommendations depending on how they disclose in the factfinding stage.
I’ve had clients who don’t fully disclose their expenditure as they are embarrassed about their lack of control regarding debt they have racked up or their wardrobe full of designer shoes.
The client can become exhausted from sharing their intimate ‘secrets’ about their lifestyle, aspirations, needs and fears.
They are then put through the many pages of terms of business and details of the Financial Services Compensation Scheme and Financial Ombudsman Service. They are likely to have many questions, too.
Less than 3% of retail investors read regulated pre-contractual fund disclosure documents
This takes hours online or sitting with an adviser, or both.
It is therefore unsurprising to see the FCA states less than 3% of retail investors read regulated pre-contractual fund disclosure documents.
I believe this is a combination of them having reading fatigue and the fact the disclosure documents are so poorly presented it seems as if the fund providers don’t even want them to read the detail.
So, what should investment disclosure look like? The FCA talks about machine-readable data on charges and a single figure, and I believe the public would welcome this with open arms, especially considering 63% of UK consumers have used a price comparison site to research insurance, according to Mintel.
We must be careful not to head into a ‘cheapest is best’ competition
I propose the development of a price and performance comparison site with all onshore funds included, alongside an e-mail contact and quality helpline to ensure the investing public get the information they need at the time they want it.
Hargreaves Lansdown was the first adopter of this model, which propelled it to the FTSE 100. The public now needs a non-advising and non-profit equivalent of that.
That said, we must be careful not to head into a ‘cheapest is best’ competition. It has been proved time and again the cheapest funds are generally not the best performers.
Kim North is managing director of Technology and Technical
Great piece Kim and you are so right on many counts. Yes, as I have always contended a platform (for advisers) is a utility, we don’t need being led by the nose. (If you don’t understand or be bothered, then stay out). Yes, bespoke is the only way if you are going to adequately adhere to consumer duty. And yes, there is far too much paperwork, although we have to be careful with comparisons, it isn’t always the best performers that are the most suitable (or the cheapest, as you have said)