CONSUMER PROTECTION
Less isn’t always more
Is concise, comprehensible product information better than pages of gobbledygook? Not necessarily, when it comes to informing people about investment risks.
A Key Investor Information Document (KIID) is like an instruction leaflet that is supposed to inform people about the potential risks to their financial investments. But its impact is minimal. | Source: Insight Investment
Over recent decades, product information sheets have been getting longer and longer. Disclosing as many details as possible seems the simplest way of combatting the imbalance of information that exists between companies and their consumers. But our capacity for processing information isn’t infinite. Yet nor does the solution lie in formulating these information sheets more succinctly and clearly. Rainer Baisch is a legal expert and a research associate at the University of Zurich who has been investigating this phenomenon, taking as his focus area structured financial products for small investors.
The financial market regulators of the EU invested much time and money in developing a basic information sheet for just such financial products. Since 2018 financial services providers have had to provide this information to potential clients. The sheet comprises no more than three pages and sums up the most important costs and risks in a brief, concise manner. But even here, says Baisch, it remains unclear whether or not customers actually read these explanations – and whether or not they understand them. Even comprehensible language doesn’t alter the fact that financial products are often complex entities that can seem opaque unless you have a certain understanding of figures and probabilities. Financial experts and legislators make it too easy for themselves when they simply say: “But it’s all there!”.
Product information is just one factor among many that influence our purchasing behaviour. We let ourselves be led by our feelings, we often assess risks to be far lower than they are, and we similarly tend to believe we are more competent than we really are. “It’s important to disclose information”, says Baisch. “But it’s not the all-purpose solution people like to think it is”. When it comes to topics such as retirement provision, a more paternalistic approach could help to establish more effective protection for investors. Setting up legal requirements or tax incentives could ensure that people invest a higher percentage of what they earn.
