A new report from the corporate regulator has found that disclosure alone is often not enough to drive good financial advice outcomes from clients.
ASIC’s Report 632, Disclosure: Why it shouldn’t be the default, examined multiple cases both locally and internationally where financial product disclosure has been less effective than intended, ineffective or has actually backfired, contributing to consumer harms.
Done jointly with the Dutch Authority for the Financial Markets, the ASIC report aims to question the 'myth' that if consumers are given mandatory disclosure documents, they will be sufficiently armed to protect themselves from harm.
Clients can’t judge the quality of financial advice
A shadow shopping research exercise conducted by ASIC with consumers seeking retirement advice found a large gap between the technical quality of the advice (as assessed by ASIC) and the consumers’ own assessment of that advice.
While 86 per cent of consumers considered the advice they received to be good, ASIC assessors rated only 3 per cent of the advice reviewed as good, with the remainder rated as either adequate or poor.
Further, the research also identified a disconnect between the trust or level of comfort consumers felt with their advisers and the quality of advice received.
Even though 81 per cent of consumers said that they trusted the advice they received from their adviser, an ASIC review found that 39 per cent of the advice examples were rated as ‘poor’, and 58 per cent were only rated ‘adequate’.
Warnings on general advice don’t protect clients
ASIC found that most consumers do not understand the limitations of general advice despite the general advice warning. It cited research from March that found that less than half (41 per cent) of research participants understood the limitations and most did not indicate that they would take steps to check whether the advice was appropriate for them.
The research found that 38 per cent of participants incorrectly thought that the adviser had a responsibility to consider the consumers’ financial circumstances.
In addition, 38 per cent thought that the adviser was acting in the consumers’ best interest and 26 per cent thought they were prioritising the consumers’ interests.
ASIC also noted that 31 per cent of participants incorrectly thought that the adviser had a responsibility to consider the consumer’s financial goals.
Disclosure doesn't solve complexities of financial system
ASIC deputy chair Karen Chester said the report highlights the need to rebalance the onus from consumers to firms – to become a shared responsibility.
To achieve this, she firms need to understand, measure and deliver on consumer outcomes, adding that this aligns with the Hayne royal commission and the ensuing government legislative reform program.
“The over reliance on disclosure in some ways proved an enabler of the poor conduct and poor consumer outcomes revealed by the financial services royal commission. Importantly, the royal commission represents more than a tilt away from disclosure,” Ms Chester said.
“The overwhelming majority of the commission's recommendations – over 50 – are about better firm conduct.
“Put simply, disclosure has been asked to do too much. It cannot solve the complexity of the financial system. Especially when that complexity, in the form of thousands of barely differentiated products, is firm induced.”
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