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.

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.

In December, the government announced its intention to replace the regulation, inherited from the EU, with a UK-specific product disclosure regime within the FCA’s handbook.

At the time, HM Treasury’s Priips and UK Retail Disclosure Consultation said the key information documents (Kid) that accompany products were “unnecessarily prescriptive measures that led to information being presented to investors in unhelpful or, worse, misleading ways”.

The FCA then launched a discussion paper seeking industry views on the best way to replace the regulation, with 7 March the deadline for submitting responses.

Priips legislation mandates that a Kid must contain specified information, such as potential risks and returns, the duration for which an investment should be held, and more.

Pimfa said, while it welcomes plans to scrap the current regulation, it believes any review should place a broader focus on the purpose of disclosure.

It said: “Clients frequently identify the huge amounts of mandatory information they receive as one of the most negative features of their investment experience. Consumer engagement is unlikely to improve unless this can be significantly reduced and simplified.”

Six-point plan to replace Priips

The key points Pimfa has highlighted are as follows:

• Reduce the weight placed on disclosure as a regulatory tool, recognising both low levels of consumer engagement and low levels of financial literacy in the adult population;
• Reduce the range of assets subject to any post-Priips product regime, by excluding assets such as retail bonds and convertibles, and focussing on mass market products such as funds;
• Take advised business out of the post-Priips product regime, relying instead on the suitability letter to provide consumers with information that is tailored to their needs and circumstances;
• Develop ‘headline’ disclosures that are short and pithy, focussing on ‘The six things you need to know about this product before buying’;
• Publish a coherent programme for reviewing retail disclosure across-the-board – not just Priips but all rules requiring information to be provided to clients under the Markets in Financial Instruments Directive (Mifid), Insurance Distribution Directive (IDD), Distance Marketing Directive (DMD) etc;
• Create a central retail disclosure sourcebook in the FCA Handbook, making it easier for firms to identify and comply with the wide range of rules relating to information provision.

Liz Field, Pimfa chief executive, said: “Pimfa has for many years opposed the Priips regime, and by and large, our opposition to Priips has been borne out by client experience and firm feedback.

“Like it or not, many clients do not engage with disclosure material, some because they are not able to but many more because they are simply not interested. We have an opportunity to rethink disclosure from first principles – to create simpler and more impactful disclosures for self-directed clients and to consider how information provided to advised clients can work with other regulatory protections to deliver better outcomes.

“As always, we stand ready to work with the government and the FCA to create a disclosure regime that works for the wide range of ways retail clients engage with financial services.”

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Chancellor Jeremy Hunt revealed on 9 December that the Priips rules will be scrapped in a bid to move away from legislation inherited from the EU after Brexit.

Hunt said the UK regulator will be responsible for designing and developing an alternative disclosure system tailor-made for the British market.

This will include deciding what type of information retail investors should receive in order to make an informed decision on what financial products to purchase.

More specifically, the FCA wants to hear from industry about when and in what format the information can be delivered to consumers so that it can be useful and supportive of their buying experience.

As part of the discussion paper, the watchdog is also seeking views on who should have responsibility for product disclosure.

Less rigid regime

Sarah Pritchard, executive director of markets at the FCA, said: “The current rules make it very difficult for consumers to get the information they need in the way they need it to help them make effective investment decisions.

“We now have the flexibility to design a new regime which is less rigid and more focused on the outcome we are seeking – we want consumers to have the confidence to invest and understand the levels of risk involved.

“This discussion paper aims to seek views from industry and consumers to help us design a disclosure regime that delivers to support that aim, and we welcome views from across the market to help us do so.”

Comments on the matter can be submitted to the FCA by 7 March 2023.

But the consultation to scrap the regulation, introduced as part of Hunt’s ‘Edinburgh Reforms’ of the UK financial services, which include 30 regulatory changes – was primarily attributed to the fact that Priips rules did not achieve their objective of helping retail investors “make sense of a complex investment landscape”.

Instead, the chancellor said the regulation created “unnecessarily prescriptive measures that led to information being represented to investors in unhelpful or, worse, misleading ways”, as well as “burdensome requirements” that caused firms to “restrict retail investor access to their products, reducing choice and opportunities rather than enhancing them”.

Other issues included lack of access to products created in jurisdictions outside of the UK due to high compliance costs and risks.

Hunt added that some changes to the Priips regulation had already been introduced in the Financial Services Act 2021, but these “were always only intended to provide time for further, more fundamental reform”.

“Based on the evidence that we have gathered, it is the government’s view that highly prescriptive format requirements in disclosure are not conducive to improving an investor’s understanding of the product that they are purchasing.

“They also increase compliance costs. Prescriptive formats seem to reduce the flexibility for firms to provide information in whichever format works for their clients (for example, by including sustainability information alongside performance data) and do not allow for information to be presented in ways that increase legibility.”

Reform

As a result, HM Treasury is looking to introduce a different regime for retail disclosure.

When drafting the system, HM Treasury said it has followed three principles:

• Ensuring that retail investors have access to clear and useful information to make evidence-based decisions for their prospective investments;
• Ensuring that the disclosure that retail investors receive is proportionate to the risk that they are taking in purchasing an investment product and the complexity of the decision that they are making; and
• Providing additional choice for retail investors, and to reduce burdens for firms.

Under the proposed regime, prescriptive requirements will be mostly scrapped, with the Financial Conduct Authority (FCA) only requiring them in cases were high-risk or complex investments are present.

The UK government also wants to scrap the Priips comparability feature – where different packaged products can be compared via standardised key information documents (Kids) – as they have been criticised for being too broad.

The retail disclosure will, instead, make sure that retail investors understand the nature of the product they are purchasing “to a sufficient degree to enable an informed choice”.

Firms should not provide “all the information necessary for an investor to compare different products and come to a decision, since this information can vary widely between different investors”.

But certain information, such as costs, will need to be standardised “to a significant degree” so that it is understandable for investors, the Treasury added.

Comparison features will be introduced but only among similar products “that are broadly substitutable”, potentially by product classes or grouping, according to whichever direction the FCA will decide to take.

The role of the FCA

The Treasury continued: “The government has already given the FCA powers over some aspects of the Priips regulation. Upon the revocation of the Priips regulation as part of the government’s wider programme to repeal retained EU law and replace it with a regulatory framework tailored to UK, the government is not currently aware of a need for any retail disclosure requirements to be maintained in legislation (as opposed to regulator rules).

“In line with the objectives set out [above], it will be for the FCA to deliver a new retail disclosure regime that upholds investor protection while supporting investment choice for retail investors and reducing burdens for firms.

“As set out previously, prescriptive disclosure formats and comparability are no longer appropriate goals for retail disclosure in the UK, for the reasons outlined. This is based on feedback received since the introduction of the Priips regulation in 2018.

“While this will be a decision for the FCA, it is the government’s expectation that the Priips Kid – or any new comparable prescriptive disclosure document – will no longer be a feature of the UK’s new retail disclosure regime.”