However, judging by some of the findings from the Financial Conduct Authority’s (FCA) recent Financial Lives survey, there’s considerable scope for improvement when it comes to the information consumers reply upon. Upcoming regulatory changes could be exactly what’s needed.

Too many consumers don’t find financial services communications helpful

Financial Lives is the FCA’s ongoing research into UK consumers’ attitudes to money, their financial products and their experiences of engaging with financial services firms.

The latest survey found that 73% of people who had used any form of communications from financial services providers in the year to May 2022 found them to be useful. Which is, admittedly, a substantial number of people. But that leaves 4.9 million people – more than 54 Wembley stadiums-worth, or more than the entire population of Croatia, depending on your preferred metric – who found that the communications they received didn’t help at all.

Over the same period 4.3 million people received information from their provider that they couldn’t understand, wasn’t what was needed, or wasn’t timely.

This is a situation which has to change, and there’s no easy remedy – there are multiple reasons why the documentation clients receive is not ideal. Different clients will respond in different ways to the information provided.

Even firms which know their customers’ preferences very well are constrained by the requirements of regulation. No financial services firm has a free rein to communicate exactly as they would like to.

However, while occasionally frustrating, this protects consumers from the few bad actors who might attempt to hide relevant information or manipulate decisions.

New regulations suggest change for the better

The Consumer Duty places the onus on firms to provide communications that meet the needs of their customers, and which they can understand. That is why the work being done to replace the packaged retail and insurance-based investment products (PRIIPS) regime is a genuinely positive development.

The PRIIPs rules, and the key information documents (KIDs) that came with them, are a hangover from EU legislation (in the sense that they gave people a headache and made their day worse) because their target was never the UK financial services industry.

The rules came from a well-intended idea to standardise the information received by customers, across products and across different providers.

Originally the plan was that customers would receive a single page of information in a standardised format for any product they were interested in.

Unfortunately, and inevitably, it was impossible to devise a format that provided meaningful information everywhere. At best the key information documents were off-putting and at worst required some firms to provide information that was actively misleading.

The problem with implementing in the UK was the level of prescription in the rules. They gave very little room for adaptation – certain performance scenarios, for example, because of the way they had to be calculated and presented, gave very unhelpful information to clients.

The worst of these rules have already been addressed, with the FCA given powers to remove actively misleading content from the disclosure rules back in March 2022, including replacing performance scenarios with a requirement for narrative information.

A UK focus will mean more aligned regulation

Both the Treasury and the FCA have been consulting on what happens next. In July, the Treasury confirmed that the government will be entirely revoking all PRIIPs-related retail disclosure elements from legislation, on the basis that the FCA will deliver a new UK-specific retail disclosure regime.

The FCA issued a Discussion Paper in December about what that regime might look like, and we’re expecting further outputs and draft rules from that. One thing we can expect is a change to the rules for UCITS (Undertakings for Collective Investment in Transferable Securities) which are currently exempted from having to produce a PRIIPs KID in favour of a separate disclosure regime.

Given the similarities between products marketed to retail investors under both regimes, the government plans to integrate both PRIIPs and UCITS disclosure in the future retail disclosure regime.

From an industry perspective these are positive developments, as they mean that future rules will be designed for the UK market, and a matter for the FCA, rather than set by legislation.

This means it will be much easier to align it to other regulation, in particular the Consumer Duty and especially the rules around the consumer understanding outcome, which requires information to be demonstrably understandable by the target market of the firm.

One barrier to providing information that’s actually meaningful for your clients will have been removed. It’s a slow process, but we’re now moving in the right direction.

This article was written for International Adviser by James Street , Adviser Success Manager at Morningstar Wealth.

More specifically, the regulators are targeting the ‘What is this product?’ section following the identification of a “range of poor practices in how Priip manufacturers describe products”.

They found a “general lack of clarity” in the text making it difficult for retail investors to fully understand the key features of the products in question.

As a result, the three watchdogs have included expectations within their statement on how to improve the quality of descriptions provided by Priips manufacturers and increase the protection of retail investors.

The measures aim to ensure that information is provided to retail clients in an “adequate, clear and accessible manner,” the ESA said.

They include:

• The use of overly broad, general categories when specifying the type of product;
• Poor practices regarding the overall clarity of the language and layout of the text, including as a result of automation in creating such texts;
• Insufficient information regarding capital protection levels and potential losses for the investor;
• Imprecise description of early termination features;
• Lack of clarity concerning the nature and timing of the coupon payments;
• Limited information about the specific nature of the underlying assets to which investors are exposed;
• Inadequate description of any leverage factors and the risks related to them; and,
• Undifferentiated and abstract descriptions for the ‘intended retail investor’.

The input from the sector will then be used in their technical advice to the European Commission when it reviews the key information document (Kid) for Priips.

The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (Eiopa) and the European Securities and Markets Authority (Esma) are looking to understand how financial advisers use Kids, how they fit into their digital media practices, and how complex and readable the documents actually are.

More specifically, the commission asked the ESAs to provide advice on:

• The use of the Kid;
• The operation of the comprehension alert in the Kid;
• The practical application of the rules laid down in the Priips regulation;
• The effectiveness of administrative sanctions, measures, and other enforcement actions for infringements of the regulation;
• The extent to which the Priips regulation is adapted to digital media; and,
• The scope of the regime.

The ESAs have released a survey professionals can fill in to provide information on the matter, which will close on 16 December 2021.

The regulators will then hold a stakeholder event in Q1 2022 before finalising its advice to the European Commission, which is due by 30 April 2022.

The regulator’s original intentions were to implement the changes from 1 January 2022.

The FCA said: “In our Priips consultation, we noted that we expect final rules to take effect in January 2022. We are now aiming to publish our policy statement in Q1 2022.

“This will include confirmation of when the rules will take effect and any implementation period.”

Encouraging

Richard Stone, chief executive of the Association of Investment Companies (AIC), said it was encouraging to see the watchdog listen “to industry concerns” and take its time to “get the changes to Kids right”.

“This will give the regulator breathing space to consider how best to change Kids to help investors make better decisions. We hope one option being considered is bringing Kids’ performance disclosures in line with those of Ucits funds.

“Getting more people involved in investing is a goal which policymakers and the industry share. But to make it work, consumers must have confidence in the products they’re offered, and this can only happen if they have reliable and accessible information. That’s something that Kids do not provide.

“The FCA has recognised the need for reform, but it can only do so much. The Treasury should play its part and launch the promised review of consumer disclosures to bring all investment products into an effective disclosure regime. Brexit has given the government the chance to do things better and we urge it not to delay any further.”

The AIC recently slammed the FCA and the UK government for their lack of action in changing the Kid regime.

The AIC said that the Packaged Retail and Insurance-based Investment Product (Priips) disclosure regime needs changing, especially when it comes to providing clients with Kids.

This is because the association believes the documents “overstate potential performance and understate risks which can mislead consumers about the returns that they could receive”.

But after a review of the regulation was commissioned in July 2020, the AIC argued that meaningful change needs to happen soon.

The trade body said that “tinkering around the edges” will not solve “fundamental flaws” and that Kids should be suspended and a “meaningful review announced” during chancellor Rishi Sunak’s budget at the end of October 2021.

‘Enough is enough’

Richard Stone, chief executive of the AIC, said: “We understand that the past 12 months have been very challenging for the government and regulators but it’s time to make meaningful changes to Kids.

“Enough is enough. The treasury committed to a wholesale review of the regulation in July 2020, and we are still waiting for progress. Given the problems with Kids, which have been widely recognised ever since their launch four years ago, it’s clear the FCA’s proposals don’t go far enough.

“Swapping performance scenarios for narratives and allowing Kid producers to manually upgrade their risk ratings won’t address the fundamental flaws with these documents.

“The FCA acknowledges the harm Kids pose to consumers. Rather than tinkering around the edges, the Treasury should conduct a full-scale review of the Priips regulation. Until that happens, Kids should be suspended.

“Far from helping people make better informed decisions, these documents are misleading investors and distorting the market, with Ucits funds still producing an entirely different disclosure that is not comparable. We call on the chancellor to announce a more meaningful review alongside the autumn budget.”