Who really reads the fine print? Fintechs welcome ASIC’s hands-on approach to dodgy finance

The fintech industry has welcomed a new report from the corporate regulator that finds reliance on mandatory product disclosure in the financial services sector has gone too far, as companies prepare for a shift in the watchdog’s focus.

The Australian Securities and Investments Commission (ASIC) yesterday said it won’t hesitate to use new product intervention powers to secure better outcomes for consumers of financial services products.

After being dragged over the coals during the banking royal commission for its approach to regulating the financial services sector, the regulator has admitted there’s been too much emphasis on firms telling consumers about their products.

In a new report released yesterday afternoon, prepared in partnership with Dutch financial markets regulator AFM, the corporate watchdog laid out the case against an over-reliance on disclosure, saying companies need to do a better job with product design and distribution.

Basically, research has routinely shown that even those consumers who do read the fine print and other warnings aren’t necessarily in a position to make informed decisions.

Companies know this, and in many cases, actively take steps to make the problem worse because there’s a financial incentive in complexity.

ASIC’s not a fan of this type of behaviour and wants businesses to develop simpler products that can be more easily communicated to customers and better meet their needs.

Those who don’t might find themselves on the wrong end of the watchdog’s new powers, which enable it to ban particular products, as it has done recently with some payday lending services.

Rebecca Schot-Guppy, general manager for FinTech Australia, welcomed the report, saying ASIC’s renewed focus “goes to the heart” of new reforms sweeping the financial services sector.

“We support any reform that makes it easier for consumers to get the information and knowledge they need to make informed choices,” Schot-Guppy said.

“Fintechs do an incredible job of going above and beyond with disclosure. Many aim to educate the market in addition to promoting all facets of their products.

“We believe the industry is already at the forefront of disclosure and is paving the way for fairer a financial services industry.”

Newsflash: Markets are hard

ASIC’s report canvasses well-established knowledge about the operation of consumer markets, especially those which deal in relatively complex transactions such as financial services.

This includes the presence of information asymmetries (no-one knows everything and people know different things), perverse incentives (complexity can be good for business), and cognitive bandwidth affecting risk perception (humans aren’t great at understanding all potential downsides and upsides).

One recurring issue in markets, particularly ones were complexity reigns, is that suppliers (firms) are more likely to have better information about both their own products and those of competitors. They also have a financial incentive to use this information to make more money.

This behaviour can cost consumers, who in contrast don’t have the same access to high-quality information and also generally don’t specialise in the consumption of a particular product. Reading the fine print is also onerous.

In light of these lessons, ASIC is blowing the proverbial whistle, outlining its intention to take a more “consumer outcome-focused approach” that will include the use of new product intervention powers and “setting expectations for firms to deliver good consumer outcomes” under design and distribution obligations.

Dubbed “sludge”, ASIC said unnecessary product complexity is creating barriers to switching products, making complaints and product comparison. In one example, only two-in-five Australian consumers presented with a product fact sheet were able to select the “objectively best” home insurance product.

Switching products, access to redress and product comparison are all pretty essential elements of a well-functioning market where firms compete through the optimisation of consumer outcomes rather than how creatively they can sell a service.

Rebalancing: A shared responsibility

For SMEs and startups operating in the financial services sector, this essentially means ASIC has become less interested in letting firms tend their own fence with mandatory disclosure and wants companies to be more proactive about ensuring their services are delivering good consumer outcomes.

“Our report highlights the need to rebalance the onus from consumers to firms — to become a shared responsibility.  To do this, firms need to understand, measure and deliver on consumer outcomes,” Chester said.

“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.”

This is where ASIC’s new product intervention powers come into play. The regulator is now able to intervene in the financial services market where financial and credit products have resulted in, or are likely to result in “significant consumer detriment”.

Edwena Dixon, the owner of Pinpoint Finance, says ASIC’s new report raises concerns too.

“The concern is that there is an increased assumption from regulators that consumers are not able to take personal responsibility for their own actions and decisions,” Dixon tells SmartCompany.

New powers, new horizons

ASIC’s product intervention powers were used for the first time in September to ban a particular payday lending model used by companies such as Cigno Pty Ltd and Gold-Silver Standard Finance Pty Ltd. ASIC argued financially vulnerable customers were incurring “extremely high costs they could ill-afford”.

At a time where the financial services industry is expanding at breakneck pace with the advent of financial technology and the introduction of open banking, ASIC is spending a considerable amount of time monitoring how companies are designing and marketing new types of products.

Over the last 18 months, the regulator has been particularly focused on fast-growing buy-now-pay-later companies, successfully lobbying to have its intervention powers expanded to cover companies such as Afterpay and Zip.

The new enforcement approach comes in addition to new product design and distribution obligations, which were passed by the federal government in April alongside the product intervention powers.

These obligations set out a range of standards for how financial services companies create financial and credit products, aimed at ensuring firms are operating with consumer interests in mind.

The obligations require product issuers to develop target markets for their financial products, which then restrict how that product can be distributed, in essence making it much more difficult for customers to bundle together complex service plans that aren’t necessarily fit-for-purpose for a particular customer.

All this doesn’t mean that mandatory product disclosure is going anywhere. ASIC says there’s still an important role for disclosure to play, but isn’t going to be the only lens the regulator looks through when assessing a financial service.

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