The FCA launches discussion on the future UK retail disclosure regime
On 13 December, 2022, the UK Financial Conduct Authority (the FCA) launched a discussion paper (DP22/6) on the future of retail disclosure in the UK. This is a key component of the UK Government’s proposed Edinburgh Reforms, as part of which the Government announced its intention to revoke the current retail disclosure requirements in the UK onshored versions of the Packaged Retail and Insurance-based Investment Products Regulation (UK PRIIPs) and the Undertaking for Collective Investment in Transferable Securities Regulation (UK UCITS) in favour of a new approach to disclosure to retail investors “tailored to the UK market’s needs.”
In DP22/6, the FCA proposes a move away from a “one size fits all” approach to retail disclosure, which the FCA claims is not fit for purpose due to its rigidity, and fails to adequately support investor decision making.
Who will the rules apply to?
The new disclosure regime will be of particular interest to:
- firms that manufacture non-PRIIP packaged products, PRIIPs, UCITS and certain non-UCITS retail schemes (“NURS”); and
- firms that advise on or distribute non-packaged PRIIPs, PRIIPs, UCITS and such NURS including, amongst others, fund managers (e.g. overseas fund managers, wealth managers and financial advisers) and firms operating retail distribution platforms.
What does DP22/6 say?
DP22/6 considers the following key themes:
(i) Delivery of retail disclosures in an appropriate format (i.e. technology neutral and future-proofed to encourage innovation) at the appropriate time to benefit retail investors.
The FCA seeks views on such matters as when, and in what format, information should be disclosed to investors, as the FCA considers that the current one size fits all pre-contractual key information document (KID) (for PRIIPs) and key investor information documents (KIIDs) are no longer “fit for purpose”.
The FCA also seeks feedback on the “relationship between manufacturers and distributors on the responsibility for designing and delivering disclosure(s)” to retail investors.
Given their understanding of the product, the FCA suggests that product manufacturers may be best placed to prepare the retail disclosures; balanced against this is the fact that, as the FCA notes, “distributors will have more interaction with the end purchaser, so may have a better understanding of how the intended target market will want to see information presented.”
(ii) Disclosures should be “accessible and engaging and have enough flexibility to allow information to be presented optimally for the consumer.”
The FCA notes that research suggests that the use of images, graphics, prominent display of key information and plain language helps consumers retain information. DP22/6 invites views as to whether “layering” disclosures may assist with this process (i.e. providing certain information upfront and granular details later) and combining this with character limits rather than adopting a prescriptive approach.
The FCA also seeks views on the use of dashboards to provide product information, and the potential use of interactive disclosures that could facilitate investors’ understanding of investment products.
(iii) Adopting a transparent approach when providing information to retail investors at the pre-contractual stage.
The FCA is seeking feedback on transparency of costs and charges to assist investor decision making that include charging structures specific to different investment product types.
DP22/6 also invites views on the transparent disclosure of risks to retail investors by focusing on the display (by using visuals or otherwise) and calculation of such risks.
The FCA notes that research suggests that retail investors placed too much emphasis on past performance, when compared to other factors (e.g. costs) that may affect their return. The FCA is seeking input on the presentation of performance scenarios or past performance depending on the type of investment product.
Other more general points in DP22/6 include tailoring information to a targeted audience, whether an investor’s right to redress should be presented at the outset and how disclosures could potentially complement other regulated disclosure regimes such as the upcoming UK SDR.