The problems begin firstly for the writers of financial advice when they ask: how do I know what I have written is clear, concise and effective? Moreover, as this is a legal requirement, what legal principle or test do I apply to what I have written to make sure that it is clear, concise and effective? And in the worst case, suppose someone takes me to court claiming that my advice is not clear, concise and effective, what would be my defence, and how would the court decide?
For consumers, the problems are just as obvious, and no less difficult. Suppose as a customer you are given a document that you are told is ’clear, concise and effective’, and you cannot find what you are looking for, make sense of what you find, or use it to make a decision. Who’s at fault? Many consumers will say silently to themselves: “I must be stupid, and that makes it my fault!” If added to this ’clear, concise and effective’ document is a ‘Crystal Mark’ (as in the UK) or an ‘Award for Clarity’ (as in Canada), you can virtually guarantee that the document is beyond criticism, like the emperor’s clothes. (In my view such ‘Marks’ and ‘Awards are a pernicious evil and I hope never come to Australia. At the very least they are questionable under the ‘misleading or deceptive conduct’ provisions of legislation that is there to protect consumers. But more importantly, they inhibit legitimate complaint and criticism. If a document is clear to consumers, why do you need a certificate on every copy of the document to say so?. Who is assuring whom, and more significantly, who is promoting whom? In the guise of ‘empowering’ consumers, they in fact disempower everyone.)
These are some of the issues which this type of regulation gives rise to. I say ‘type of regulation’ because this is just one of the possible ways in which regulators can try to control business in the public interest. It’s what I call a ‘content-based’ approach to regulation; it controls business by requiring the mandatory inclusion of some or all of the content of a document, label, etc. As long as the mandatory content is present on a document, the document is legal.
In many jurisdictions, a rigid content-based approach is common. The resultant documents are usually incomprehensible to most customers. But the regulators can claim that they have discharged their duty to protect the public interest by controlling industry. And the industry, parts of which have no interest in clear communication with its customers, simply complies. On the question of clear communication with the public, both partake in a complicity of silence but claim to have discharged their public obligation.
ASIC’s approach is content-based but it seeks to control the quality of the content of documents rather than rigidly prescribing the content. It is potentially better. Note that I say potentially better, not actually better. It will only be better if the questions such an approach raises are addressed.
This may be happening. The demand for quality has resulted in a highly productive dialogue between the financial services industry and the regulator, out of which is emerging a body of practice that in many respects has the capacity to develop something far more useful than the requirement to be ‘clear, concise and effective’: what I have called a ‘performance-based’ approach to regulation, where the emphasis is on the tasks people can perform with the documents.
But there is a long way to go.
Last year, ASIC produced an example of what it claims was a ‘clear, concise and effective’ Statement of Advice (SOA) for use by financial advisors. How do we know that this example is ‘clear concise and effective’ and for whom? Well, we don’t. ASIC claims it is, but offers us no evidence in support of its claim.
This is the next step—providing credible evidence in support of such claims. To do this requires a very different approach to regulation and, for that matter, self regulation by the industry. It requires what I have called a ‘performance-based’ approach to regulating information provided by industry to consumers. Instead of focusing on the content of the documents, the focus should be on how well consumers can use the documents. And that requires industry and regulator to agree on what it is people should be able to do with the documents, before they create examples, and then provide evidence to show that the examples can indeed be used by consumers to do these things. I’m encouraged to see that the Financial Planning Association in Australia (http://www.fpa.asn.au) is rising to this challenge through their guidelines for their members: Guide to the development of effective Statements of Advice.
I hope that many follow their lead.
So ‘Clear concise and effective’ was a good beginning, but it will never, in itself, be either clear, concise, or effective enough to regulate financial information.