Why a 'prescriptive' disclosure approach isn't doing its job

"Information given too early will be disregarded, and disclosure too late leaves the risk of the consumer feeling locked in"

Why a 'prescriptive' disclosure approach isn't doing its job

Insurance News

By Ksenia Stepanova

The new financial advice regime comes into effect on March 15, 2021, and with the proposed full license requirements released, advisers are going full steam ahead with preparations.

Many advisers seized the chance to get their new systems and processes sorted over the lockdown period, and Global Finance founder Ajay Kumar says that feedback from banks, insurers and independent directors has been an invaluable source of guidance. He says that for many advisers, disclosure requirements and record keeping will need particular attention, since current requirements don’t always get the desired outcome.

“We’ve been giving a lot of attention to the government requirements,” Kumar commented.

“We have an advisory board now, and we have three external independent directors. We’re strengthening our governance, and we’re seeking a lot of guidance to make sure that we fulfil all the conditions of the transitional license so that we can confidently apply for a full license.”

“We get feedback on our day-to-day work from the banks, and from insurance companies,” he explained.

“They give continuous feedback, and they continuously emphasise that advisers should up their quality. The FMA’s role is supervisory, and they’re making sure that we have the policy framework in place to provide your services over the long-term.”

Kumar says that banks and insurers have been doing their best to help advisers along the journey, often by improving their own application systems and ensuring easy, efficient record keeping. He says good record keeping and disclosure will be one of the most important parts of the new regime, and that all advisers should be actively looking at improving how they carry this out.

“Banks and insurers are also constantly trying to improve in quality themselves, and make sure that the customers get a good outcome,” Kumar said.

“We’re also making sure that we have all the correct procedures and systems in place, and that we have proper records and documentation in such a way that it can be retrieved. The FMA has issued eight guidelines for the full license process, and record-keeping will be very necessary.”

“This sector will absolutely get more importance in the future,” he added. “Those who can improve their policies, systems and governance and offer genuinely good advice will have a bright future.”

The Ministry of Business, Innovation and Employment (MBIE) is in charge of seeing the regulation through to completion, and financial markets manager Sharon Corbett says the key aim of the changes is to make sure customers get the right information at the right time. She says timing can often make a crucial difference to client decision making, and the previous “prescriptive” approach was simply not doing its job.

“The comments and input advisers have made have really improved the regulation, and we’ve made quite a few changes as a result,” Corbett noted.

“Some have wondered why we’ve shifted away from the current approach of just having a prescriptive statement you can give to clients - essentially, we want clients to have information that is going to help them determine where to find the financial advice that they need.”

“We’ve spoken to people over the years who say they talk their clients through those disclosure statements, and make sure they understand the really important parts, which is fantastic. But we’ve also identified big issues with the current requirements,” she explained.

“There’s confusion because different types of advisers disclose different information, and there can be a lack of transparency about the factors that can influence financial advice. We know that disclosure statements can be long and legalistic, and not necessarily provided at a point in time that helps the consumer make a decision.”

As part of the process of developing the new regulations, MBIE carried out a range of consumer testing. According to Corbett, one consumer said they didn’t really read the disclosure document they were given, they had 10 forms to fill out plus another document tacked on at the end, and they ultimately didn’t pay much attention to any of it. Corbett says this was a common theme for consumers, and highlighted just how ineffective the current disclosure process is.

“Consumers should receive the right information at the right time,” she said.

“Our research found that information given too early in the process will often just be disregarded, and disclosure too late in the process leaves the risk of the consumer feeling locked in and the information may not play a meaningful part in their decision making.”

“Consumers should receive effective disclosure regardless of whether they’re getting advice in person, online or over the phone,” she added.

“Finally, we need to ensure that advisers can comply with these requirements in a way that won’t provide undue compliance costs. These are the primary objectives of the new requirements.”

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