On 13th December 2022 the UK Financial Conduct Authority (“FCA”) published Discussion Paper 22/6: Future Disclosure Framework (“DP22/6”). The purpose of DP22/6 is to solicit opinions on the FCA’s ideas for creating a UK specific retail disclosure framework. In our first circular of the 2023, we summarise the key points of DP22/6 for the benefit of firms serving retail clients.
Who should read, and possibly comment on, DP22/6?
DP22/6 (and this article) will be of interest to:
- issuers of structured products and derivatives;
- firms operating retail distribution platforms;
- firms which manufacture non-PRIIP packaged products, PRIIPS, UCITS and certain non-UCITS retail schemes; and
- those who advise on or distribute these.
Quick recap – the PRIIPs regulation
The Packaged Retail and Insurance-based Investment Regulation (“PRIIPs”) entered into force on 1st January 2018. Since this date, firms involved in manufacturing or distributing (advising on or selling) certain retail investment products have been required to:
- create a key information document (“KID”) for each in-scope investment product;
- publish these KIDs on their websites; and
- provide the relevant KID to retail clients before they purchase an in-scope investment product.
A broad range of retail products are caught by PRIIPs. This includes derivatives (options, futures and contracts for differences). For a full list, please navigate to the FCA “PRIIPs disclosure” link at the end of this article.
KIDs are standalone documents that must contain a specified range of information. Again, please see the “PRIIPs disclosure” link for more information.
The purpose of a KID is to help investors understand the key features, risks and costs of an investment product.
What would a UK retail disclosure framework mean for the PRIIPs regulation?
The existing PRIIPs regulation will be revoked.
Why is the UK seeking to replace PRIIPs?
The UK is seeking to establish its own retail disclosure regime for the following reasons:
- to maintain pace with digitisation: existing regulations were conceived at a time when paper-based disclosures were more common. However, the FCA cites research that found UK investors to be the “most digitally savvy in Europe”. Accordingly, it is believed that UK investors are less likely to engage with paper or PDF based disclosures than investors based in the EU-27; and
- to make retail disclosures more proportionate and flexible: the FCA believes that the existing regulations have encouraged some firms to over rely on PDF disclosures at the expense of usefulness. In addition, the FCA is keen to move away from the length prescriptions (three pages of A4) that currently apply to key information documents (“KIDs”).
The new retail disclosure framework would complement the introduction of the Consumer Duty.
What are some of the main ideas the FCA has floated to improve retail disclosures?
The key ideas outlined in DP22/6 include:
- making disclosures “technology neutral”: the FCA considers the advantages and disadvantages of making disclosures machine readable for the benefit of third-party price comparison websites. However, the FCA states that it is likely to retain “durable medium” requirements, at least in the short term, as some investors will still want to receive paper-based disclosures. Furthermore, the FCA recognises the importance of storability and unchanged reproduction;
- asking whether distributors would be better placed to design disclosures than manufacturers: this is because, whilst manufacturers have more information about the product, distributors should have a better idea of what investors find useful through regular interactions;
- similarly, considering whether distributors should be held liable for selling a financial product to a retail investor without having made the required disclosures: currently, liability rests with the manufacturer;
- ending prescriptive presentation requirements in favour of “good design”: the idea of good design is to ensure information is presented in a way that is “novel, simple and accessible”. These features greatly increase the likelihood that a consumer would retain, and use, information that is imparted in a disclosure. Accordingly, good design might include all or some of the following features:
- the use of plain language instead of jargon;
- the use of images, graphics and tables. The FCA believes that visual representations of risk are of particular use to persons with low financial literacy;
- the employment of “layering” in place of “information overload”: providing simple information up-front, with signposts to more detailed information if a consumer wishes to access this. This would help ensure that key details are not lost in lengthy and potentially intimidating disclosures;
- providing a dashboard of costs, risks and recommended or minimum holding periods; and
- making disclosures interactive, for example including pop-ups to help explain key terms;
- retaining prescription where this is essential or aids comparability between products and services: the FCA considers that prescribing how costs and charges are disclosed is essential. Nevertheless, the FCA is keen to encourage balance in the way this information is presented to make it more user friendly, for example utilising “layering” (see above) when seeking to explain complex fee calculation methodologies; and
- ending the “one size fits all” nature of the current disclosure regime to give manufacturers and distributors flexibility to customise information requirements to specific target markets and products: more detailed information would be provided in disclosures pertaining to complex products. Information might be presented differently to consumers with less experience of investing. Lengthy information about complaints and redress processes might be provided elsewhere.
What is the deadline to provide feedback to the FCA?
Interested parties have until 7th March 2023 to provide feedback.
Like the Consumer Duty, the objective of overhauling the retail disclosure framework is to improve outcomes for investors. The removal of the one-size fits all KID in favour of clearer and more targeted information is intended to help investors make evidence-based investment decisions. If adopted, the ideas in DP22/6 would not amount to a reduction in regulation. Instead, they would make regulation smarter.
C&G’s consultants have substantial experience of designing and implementing compliance programmes in firms serving retail clients. Please contact us if you have any queries about the contents of this circular.
- DP22/6: Future Disclosure Framework, Financial Conduct Authority. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-6-future-disclosure-framework (last accessed 3rd January 2023).
- PRIIPs disclosure: Key Information Documents. Available at: https://www.fca.org.uk/firms/priips-disclosure-key-information-documents (last accessed 3rd January 2023).