Spotlight on product disclosure

One of ASIC’s current strategic objectives is ‘confident and informed investors and financial consumers’. In working towards this outcome over the past year, ASIC has issued several regulatory guides and consultation papers which relate to disclosure and marketing of financial products and services.

Confident and informed investors and financial consumers

One of ASIC’s current strategic outcomes is ‘Confident and informed investors and financial consumers’1. In working towards this outcome over the past year, ASIC has issued  several regulatory guides and consultation papers which relate to disclosure and marketing of financial products and services2.

Given our regulatory regime does not determine which products are suitable for retail investors and the disclosure requirements are the same for all products, ASIC has determined that some financial products, due to their risk or particular features require further specific guidance. The issuance of consultation papers for unlisted property schemes and hedge funds are examples of this approach.

ASIC has also issued guidance around it’s interpretation of the ‘clear, concise and effective’ disclosure test. It is clear from RG228 that ASIC is particularly focused on effective disclosure while glossing over the concise element of this disclosure test. We consider RG228 will result in more comprehensive disclosure documents.

With the end of the transition period for shorter form product disclosure statements having recently passed, our disclosure based regulatory system is developing into a two tiered approach of  simplified standardised disclosure for simple products versus enhanced product specific disclosure, depending upon the investments of the particular product. This may present opportunities for regulatory arbitrage.

In recognition that even with all this guidance around the content of disclosure documents, investors may choose not to read the product disclosure statement and instead make financial decisions on the basis of advertising, ASIC has also increased its focus on advertising of financial products and provided guidance in this area.

The following is a highlight of some of these developments on disclosure.

CP174 hedge funds

Complex investment products, such as hedge funds, have long been on the radar of ASIC, given our disclosure based regime where any investment product may be offered to retail investors. ASIC has been in the process of consultation for over a year on new proposals for disclosure for hedge funds in Australia, including requiring more information on underlying investments and benchmark based disclosure. CP174 is now the second wave of ASIC’s consultation.

There are some interesting issues up for discussion in CP174, aside from the obvious debate around what a hedge fund is, and the regulatory arbitrage presented by falling within the technical definition of ‘hedge fund’ or outside the definition.

For example, CP174 proposes that hedge funds disclose costs at each layer of the investment together with a worked example of the accumulated impact of these fees and costs over a year. Describing a cost estimate as a proportion of the amount invested for each underlying fund, structured product or managed account could prove cumbersome and may present some confusion. While there may be policy reasons to promote this additional disclosure, this disclosure should be consistent across all managed investment schemes to enable comparability across products.

Likewise, the CP174 proposal to require periodic reporting is quite far reaching. In addition to monthly updates, the issuer is expected to provide detailed information on their website annually that includes some information that could be considered sensitive. This takes periodic disclosure beyond current industry practice and issuers may be faced with significant compliance costs. Its is unclear why this level of periodic reporting disclosure is considered to be necessary only for hedge funds.

Whilst there appears to be support for the general approach in CP174, concerns have been raised by the relevant industry associations that some of the disclosure requirements in CP 174 will result in hedge funds not having a level playing field. This is because hedge funds will be required to provide enhanced disclosure, compared to other types of investment funds which will not be required to disclose the prescribed information in CP 174.

RG228 and ‘Clear concise and effective’

SIC has decided to assist issuers with its interpretation of the Corporations Act ‘clear concise and effective’ test, as it relates to disclosure documents for securities. Clearly this guidance will also be relevant for issuers of PDSs, which applies the same Corporations Act ‘clear concise and effective’ test. ASIC contends that its guide does not change the law, but explains what has always been its view on the interpretation of this test.

However, there are some elements of RG228 which take disclosure further than current industry practice such as the requirement to include an ‘Investment Overview’ at the start of a disclosure document. While in practice many issuers have included something akin to a ‘Key Details’ section at the start of the document which tended to focus on the practicalities of investing, ASIC consider the Investment Overview should include more meaningful information to assist with the investment decision up front.

ASIC’s stated focus in RG228 is to ensure that the sections at the front of the disclosure document highlight key information about the offer to help retail investors make informed decisions and that the disclosure of risks and benefits are balanced. ASIC seeks more description of the investment strategy, structure and persons involved. It also asks for the risks to be explained in more detail, with explanations of why they exist, what the implications are for investors, and encourages the use of examples.

While it makes sense to try to address the problem of investors not reading past the first few pages of a disclosure document, it may now encourage investors to stop at the Investment Overview. An investor may form the view that as they have all the information they need from the Investment Overview, they do not need to read the remainder of the document.

The practical outcome of applying the approach in RG228 is that now, more information appears to be required and repeated in a disclosure document to make it ‘clear concise and effective’.

Short form PDS

While many disclosure documents are getting longer as a result of recent ASIC guidance, the industry has also just completed the process of transitioning to the short form PDS regime for ‘simple’ products. 

In brief, the philosophy behind short form PDSs (SPDS) is that simple products including certain superannuation funds and simple managed investment scheme products can be described by an issuer in a standardised eight page disclosure document to assist an investor compare products. Key information such as features, benefits, risks, investment options, fees and costs and taxation must be covered by the SPDS whilst additional information may be incorporated by reference. The additional information is located separately, generally by way of an additional information booklet or via the issuer’s website.

This raises some issues

First, if the philosophy behind an SPDS is to encourage investors to read it because there’s less information to digest, there is potential that the information presented may be too high level and generic to provide meaningful disclosure and may see the development of ‘standard form wording’. This also diverges from the enhanced disclosure approach promoted by RG228, which requires issuers to make disclosure more specific.

Secondly, if an investor is required to cross refer to material placed on an issuer’s website to obtain that meaningful disclosure, this will place more onus on investors, and will they in fact do it?

Finally, the liquidity test used to determine what a ‘simple’ product is, has some flaws. Goverment bowed to industry pressure in December 2011 indicating that hedge funds, superannuation platforms and multi-funds would be excluded from the SPDS regime. Rather than addressing the flaws in the liquidity test, such as acknowledging that this is not the best basis for determining whether a product is simple or not, ad hoc exemptions are being made on a product by product basis. ASIC was left with the difficult task of defining hedge funds and multi fund PDSs to give effect to the Government’s announcement that such products would be excluded.

RG234 and advertising

ASIC’s objective for many of the initiatives discussed above is to enable investors to make informed decisions when choosing financial products, However, ASIC also acknowledges in RG234 that many investors are heavily influenced by advertising when making a financial decision and may not even read the relevant product disclosure document. Given the structural reforms posed by FoFA, this is likely to increase and may be the reason for ASIC increasing its focus and enforcement activities in advertising.

The main theme of RG234, as it concerns the marketing of financial products, is that a lack of balance creates unrealistic expectations and is more likely to mislead consumers. Within the framework of the advertisement (whatever form it takes) the presentation of product benefits must be balanced by disclosure of risks, and claims made about the product must be balanced by appropriately prominent qualifications. Past performance information should be accompanied by clear warnings about reliance, and images used should not distort the message in the text.

The real question which must always be asked by the issuer is whether the messages in the advertisement are likely to mislead the ordinary and reasonable person. RG234 provides practical examples of when ASIC consider this may be the case.

Do your documents comply?

Even if you are not required to transition products to the shorter form PDS, given the recent flurry of ASIC guidance and focus on disclosure and advertising, it is a good time to revisit your disclosure documents and advertising. This is particularly important as  we have encountered ASIC’s eagerness to apply these policies  and principles even  though they are still  in the consultation process −  an indication that ASIC’s focus in this area will increase.

1 – speech by Greg Medcraft, Chairman, Australian Securities and Investments Commission to the Asian and Oceanian Stock Exchanges Federation 30th AOSEF General Assembly & Working Committee Meeting, 29 March 2012
2 – ASIC Class Order 11/576 and 11/617 (relating to transitional arrangements for shorter PDS legislation)
 – RG228 - Prospectuses: Effective disclosure for retail investors
 – RG227 - Over-the-counter contracts for difference: improving disclosure for retail investors
 – RG234 - Advertising financial products and advice services: good practice guidance
 – CP163 - Unlisted property schemes: update to RG46
 – CP174 - Hedge funds: Improving disclosure - Further consultation

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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