The future UK retail disclosure regime – the FCA opens a discussion

This note looks at the FCA’s new Discussion Paper DP22/6, “Future Disclosure Framework”.

What’s new?

On 13 December 2022, the FCA published discussion paper, DP 22/6, “Future Disclosure Framework” (the DP).

The DP opens a discussion with stakeholders as to the most appropriate future regime for retail disclosure and invites views on:

• the delivery of retail disclosure (discussed in Chapter 3 of the DP)
• the presentation of retail disclosure (Chapter 4) and
• the content of retail disclosure (Chapter 5).

Responses to the DP should be submitted by 7 March 2023.

In due course, the FCA will give its views on the feedback received, and publish a consultation paper setting out proposed rules – before this, though, it intends to conduct consumer testing.

Who should read the DP?

The DP will be of particular interest to firms that

• manufacture PRIIPs, UCITS, non-PRIIP packaged products, and certain non-UCITS retail schemes (NURS)
• advise on or distribute non-packaged PRIIPs, PRIIPs, UCITS and NURS
• provide advice to retail clients on funds and overseas funds.

What’s the background to the DP?

In the FCA’s view, retail disclosure “can provide retail investors with the necessary information to make informed, effective decisions to pursue their financial goals”.

However, the FCA’s 2017 Asset Management Market Study and its 2018 Call for Input on the PRIIPs Regulation provided evidence that the existing retail disclosure regime was not working - fewer than 3% of retail investors read regulated pre-contractual fund disclosure documents while the ‘one-size fits all’ approach under the PRIIPs Regulation was not conducive to good outcomes. In particular, criticism focused on the prescriptive methodologies that have to be applied to products with different features and characteristics.

HMT’s Consultation Paper, “PRIIPs and UK Retail Disclosure” (the HMT CP), was published on 9 December 2022 and looks at the future of retail disclosure in the UK in the context of developing a new regime to replace the EU PRIIPs Regulation and to remove disclosure requirements under the UCITS Directive. The FCA DP complements the HMT CP.

Our summary of the HMT CP can be found here.

HMT is proposing that

• in future, PRIIPs or UCITS disclosure requirements would be found entirely within the FCA Handbook rather than in legislation
• retail disclosure should prioritise providing clear and useful information that supports consumers in making evidence-based investment decisions
• disclosure should be proportionate to the risk that consumers are taking in purchasing an investment product and the complexity of the decision that they are making.

Together, these matters provide the FCA with an opportunity to design a retail disclosure framework tailored to the UK market and supporting retail investors to make informed investment decisions.

The DP invites feedback on what that regime should look like. The FCA is also seeking views as to how it can future-proof retail disclosure regulation in such a way that it does not constrain innovation in the market.

The current Financial Services and Markets (FSM) Bill seeks to bolster the competitiveness of the financial services sector in the UK. It would repeal EU law (including the PRIIPs legislation and the UCITS disclosure requirements) retained following Brexit and would pass responsibility for future retail disclosure rules to the FCA. The DP forms part of the FCA’s preparations for making and implementing these rules.

The current UK retail investment disclosure regime

As things stand, the UK’s disclosure regime for retail customers consists of a patchwork of requirements largely derived from EU legislation, not least (though not only) the PRIIPs Key Information Document (KID) and UCITS Key Investor Information Document (KIID).

• The PRIIPs Regulation requires a standalone, three page KID to be provided to retail investors before they invest in a retail investment product. The KID includes set information, presented in a pre-determined sequence of sections, with prescriptive rules around its content and presentation, the calculation methodology to be used, when it must be reviewed or revised and the timing of its delivery.

• The UCITS Directive requires a KIID to be provided. This is intended to be a uniform document that communicates appropriate information about the essential characteristics of a UCITS to investors.

  Like the PRIIPs KID, the UCITS KIID is a stand-alone document, limited to two pages, with information on the key features of the fund, set out in a consistent order. It must be provided to an investor before an investment is made. Again, like the PRIIPs KID, rules prescribe the information, formatting, presentation and delivery of the KIID.

• In the UK, COLL 4 requires a NURS to produce and provide a short document containing key investor information (NURS-KII). This has the same five sections as the UCITS KIID.

Currently, managers of UK funds who produce a UCITS KIID or a NURS-KII do not currently need to produce a PRIIPs KID.

• COBS 13 requires firms to prepare and provide a key features document (KFD) for each non-PRIIP packaged product, cash deposit Investment Savings Account (ISA), cash-only lifetime ISA and cash-deposit Child Trust Fund (CTF) and key features illustration (KFI).

  The KFD must be provided either in a durable medium or via a website and must include sufficient information for a retail client to make an informed decision about the purchase along with descriptions of the product.

  COBS 13 also requires firms to prepare and provide a key features illustration for each non-PRIIP packaged product, including information about charges and about any interest paid to clients on money held within a personal pension scheme bank account.

• Certain other pieces of onshored EU Legislation (such as MiFID II, the Insurance Distribution Directive, and the Distance Marketing Directive) contain provisions around retail investment disclosure.

Note that, initially, the FCA will only be given the powers to address disclosure requirements in PRIIPs and UCITS, though in the longer-term, its aim is to develop a cohesive disclosure regime.

What does the DP contain?

(i) Delivery (Chapter 3 of the DP)

• The way in which consumers interact with financial services has changed - the UK market has the highest percentage (65%) in Europe of consumers who are happy to bank or invest online.
• Disclosure rules, though, often regulate paper-based disclosure, which can constrain firms from delivering information in innovative and engaging ways.
• The FCA looks to ensure that information is provided at the time when it will be useful to consumers, perhaps in a modular format so that the most important information for decision-making is disclosed to consumers earlier.
• The FCA notes that it is ‘unlikely’ to move away from a requirement for a durable medium to be used, at least for the time being. It is, though, aware that in the longer term it will need to evaluate this “to enable more appropriate delivery of information and to effectively future-proof disclosure rules”.
• The FCA is also keen for any new regime to be future-proofed so it does not hamper industry innovations. This means that rules should be appropriate for the digital age and technology-neutral, with investors able to receive supportive paper-based disclosure if they prefer.
• The FCA is also assessing the pros and cons of requiring retail disclosure to be machine readable or easily processed by a computer as it feels that this would increase consumer engagement with disclosed information when the investor is in the process of making his or her decision.
• While product manufacturers have more detailed data regarding the product, distributors will have more interaction with the end purchaser, they may have a better understanding of how the intended target market will want to see information presented. The DP invites views on the relationship between manufacturers and distributors as to the responsibility for designing and delivering disclosure.
• The PRIIPs Regulation requires that a KID is provided prior to a product being ‘made available’ to retail investors. In PS 22/2 (March 2022), the FCA published rules and guidance to clarify when a product is or is not made available to retail investors. The DP seeks feedback on how best to define whether a product is made available to retail consumers and how this interacts with the relationship between the manufacturer and the distributor.

(ii) Presentation (Chapter 4 of the DP)

• The DP invites views on how retail disclosure is presented, with a focus on new and interactive approaches to design.
• Research suggests that consumers retain information presented in a way that is novel, simple, and accessible. The DP is an opportunity ensure elements of good design are integrated into FCA rules and to move away from overly prescriptive presentation requirements of existing disclosure requirements.
• The FCA seeks input on the concept of layering and whether this is an effective way to present information to retail investors. The FCA accepts that, for layering to be effective, it may need to move away from prescribing the length of a disclosure and instead applying character limits for specific information.
• The DP also invites views on the use of dashboards.
• The FCA is also considering increasing flexibility for firms to provide proportional disclosure which could vary depending on the product’s risk and complexity, perhaps presented in a way that is layered to ensure appropriate clarity.
• Given the increase in digital distribution of investments, the FCA believes it would be beneficial for a future disclosure framework to accommodate interactive retail disclosure, to allow disclosures to provide information tailored to the retail investor. Interactive disclosure could include hover-over buttons, hyperlinks or pop-ups which could help improve understanding.
• The FCA is also seeking input on how firms can be helped to use plain language that facilitates consumer understanding – for example, by adopting terms and definitions so its use is always the same and always referring to the same thing.

(iii) Content (Chapter 5 of the DP)

• Chapter 5 of the DP looks at what information the FCA should require to be disclosed to retail investors prior to entering a contract and the balance between firm flexibility and safeguarding of consumers.
• The view of both the FCA and HMT is that some elements of disclosure - such as costs and charges - are so essential to consumer investment choice that they should be more strictly prescribed.
• Much of the criticism directed at the PRIIPs regime relates to the broad-based comparability. , which the FCA recognises can be useful in many instances “to enhance consumer understanding, support competition, and reduce manipulation of data or information gaming”.
• The DP invites discussion around the degree to which there should be flexibility in the content of disclosure – while flexibility can facilitate consumer understanding by tailoring information more appropriately to the target market, prescriptive rules can facilitate like-with-like comparisons of similar products.
• Equally, some information may be so essential to a consumer’s ability to make an effective investment choice, that how it is calculated and how it is presented should be prescribed.

Next steps?

Responses to the DP should be submitted by 7 March 2023.

In due course, the FCA will give its views on the feedback received, and publish a consultation paper setting out proposed rules – before consulting, though, it intends to conduct consumer testing.