Financial products and short-form disclosure documents

Transcription

212
Capital Markets Law Journal, Vol. 10, No. 2
Financial products and short-form disclosure
documents: a comparative analysis of six jurisdictions
Andrew Godwin* and Ian Ramsay**
Key points
This article analyses the international trend towards the adoption of short-form disclosure documents
for retail financial products through a comparison of six jurisdictions: the European Union, Australia,
Hong Kong, Singapore, Canada and New Zealand.
For the purposes of the analysis, ‘short-form disclosure documents’ are defined to mean disclosure
documents in respect of which the maximum page length is prescribed, either on a mandatory or
recommended basis.
The comparative analysis suggests some important findings. These include the strong interrelationship between factors such as purpose, length, liability and language and the extent to which
each of these factors, particularly purpose, influences the other factors. Each choice or setting involves
certain tradeoffs and achieving a comfortable balance is not an easy task for legislators and regulators.
In addition, the findings reveal the challenges that all jurisdictions have encountered in terms of
incorporating the key features and risks of complex products into a short-form disclosure document.
Finally, there is widespread recognition of the need to treat disclosure as part of a broader range of
measures, including measures to improve the quality of financial advice and to increase investor
literacy.
1. Introduction
Recent years have seen a trend in many jurisdictions towards the adoption of short-form
disclosure documents for retail financial products. In a recent consultation paper on
retail structured products,1 the International Organization of Securities Commissions
(IOSCO) recommended that members design and implement ‘short-form or summary
disclosure’ documents to be provided to investors to support ‘informed investment
decision making’ and the ‘comparison of different kinds of structured products or
possible investments’.2 A variety of different names have been used to refer to such
* BA (Hons), LLB (Hons), LLM; Senior Lecturer, Melbourne Law School, The University of Melbourne.
** BA, LLB (Hons) (Macquarie), LLM (Harvard); Harold Ford Professor of Commercial Law, Melbourne Law School, The University of
Melbourne. This article is part of a research project funded by Melbourne Law School and the Centre for International Finance and
Regulation entitled, ‘Financial Products and Short-form Disclosure Documents—Challenges and Trends’ (see http://www.cifr.edu.au)
and arises out of a working paper that was prepared for this purpose. The authors thank Adam Percy for his assistance in editing this
article and Lachlan Burn, partner at Linklaters, and Ruari Ewing, Senior Director, Market Practice and Regulatory Policy at the
International Capital Market Association for their helpful comments and suggestions. All errors and omissions are the authors’ alone.
1 International Organization of Securities Commissions, Regulation of Retail Structured Products (Consultation Paper, April 2013)
(IOSCO Consultation Paper).
2 ibid 47–48.
ß The Author(s) (2015). Published by Oxford University Press. All rights reserved. For Permissions, please email: [email protected]
doi:10.1093/cmlj/kmv018
Accepted 4 February 2015
Advance Access publication 18 March 2015
Andrew Godwin and Ian Ramsay Short-form disclosure documents
213
short-form disclosure documents, including ‘shorter product disclosure statements’ in
Australia, ‘key fact statements’ in Hong Kong and ‘product highlight sheets’ in Singapore.
In addition, the European Union (EU) has introduced a ‘key information document’ for
standardized use across all products.
This trend has been driven by a number of factors, including recognition of the
limitations of the conventional approach to disclosure (particularly in areas such as
content, language and format), challenges arising out of the increasing complexity of
financial products and also the results of investor research demonstrating that retail
investors are not likely to read lengthy disclosure documents.
This article analyses the challenges and trends in relation to short-form disclosure
documents from a comparative perspective. It considers developments in the EU,
Australia, Hong Kong, Singapore, Canada and New Zealand, as these jurisdictions have
all embraced a move towards short-form disclosure documents in recent years and have
implemented—or are in the process of implementing—significant reforms for this
purpose. For the purposes of this analysis, ‘short-form disclosure documents’ are defined
to mean disclosure documents in respect of which the maximum page length is
prescribed, either on a mandatory or recommended basis.
The concept of short-form disclosure in the form of summary disclosure documents is
not new. In most cases, such documents operate alongside, or as part of, the formal
disclosure document.3 What is new, however, is the trend towards prescribing the
maximum page length of such disclosure documents. This article examines that trend.
Part II surveys each of the jurisdictions to provide the context behind the development
of short-form disclosure documents. This context includes the relevance of experience
from other jurisdictions, the key drivers and objectives behind the development of shortform disclosure requirements, the importance of risk disclosure and other developments
and proposed changes. Part III sets out the findings from the comparative analysis of the
selected jurisdictions and is accompanied by a table in the Appendix that summarizes
certain key elements across the jurisdictions. In addition to examining the purpose and
content of short-form disclosure documents among these jurisdictions, this section also
compares developments in a number of areas including purpose, length, liability, the
relative importance of risk and language. Finally, Part IV offers some concluding
observations and recommendations.
The comparative analysis suggests some important findings. These include the strong
inter-relationship between factors such as purpose, length, liability and language and the
extent to which each of these factors, particularly purpose, influences the other factors.
For example, one might argue that (a) the more detailed and prescriptive the content
requirements, the longer the document is likely to be; and (b) the more onerous the
liability implications, the more technical the language is likely to become. Conversely, the
more limited the liability implications, the more likely it is that product issuers will tailor
3 See, eg, the short-form prospectus or offer information statements that have been adopted in Australia for the offer of securities
under the Corporations Act 2001 (Cth) ch 6D.
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Capital Markets Law Journal, 2015, Vol. 10, No. 2
the document in a way that the retail investor might understand. Each choice or setting
involves certain tradeoffs and achieving a comfortable balance is not an easy task for
legislators and regulators. In addition, the findings reveal the challenges that all
jurisdictions have encountered in terms of incorporating the key features and risks of
complex products into a short-form disclosure document. Finally, there is widespread
recognition of the need to treat disclosure as part of a broader range of measures,
including measures to improve the quality of financial advice and to increase investor
literacy.
2. Comparative analysis of short-form product disclosure regimes
The European Union
Background
The EU adopted a short-form disclosure document in relation to collective investment
schemes or Undertakings for Collective Investment in Transferable Securities (UCITS) in
2009 under the UCITS IV Directive4 and the Commission Regulation.5 Known as a ‘Key
Information Document’ (KID), the document replaced the simplified prospectus for
UCITS, which had been introduced by the UCITS Management Directive in 2002.6
According to a Consultation Paper of the Committee of European Securities Regulators
(CESR),7 the simplified prospectus (SP) had been:
. . . widely seen as having failed to achieve its objectives. In particular, there [was] considered to be a
continuing lack of transparency about UCITS, especially their costs and risks; the information given in
the SP [was] not easily understood and used by the average retail investor; the SP [was] too lengthy and
technical; its production [was] costly and time-consuming; SP’s often [exceeded] the Directive
requirements; their content [was] not consistent in all Member States; and they [did] not assist
comparisons between funds, particularly when cross-border sales [were] involved.8
After considering feedback from external stakeholders, including retail investors’
representatives, and also the results of investor testing, CESR recommended that the
document containing the key investment information should be referred to as the Key
Information Document, and that the length of the KID should be limited to two sides of
A4 for all UCITS.9 As discussed in the section ‘Recent developments’ below, a similar
4 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the Coordination of Laws, Regulations
and Administrative Provisions Relating to Undertakings for Collective Investment in Transferable Securities (UCITS) [2009] OJ
L302/32 (UCITS IV Directive).
5 Commission Regulation (EU) No 583/2010 of 1 July 2010 Implementing Directive 2009/65/EC of the European Parliament and
of the Council as Regards Key Investor Information and Conditions to be Met When Providing Key Investor Information or the
Prospectus in a Durable Medium Other Than Paper or by Means of a Website [2010] OJ L176/1 (Commission Regulation).
6 Directive 2001/107/EC of the European Parliament and of the Council of 21 January 2002 Amending Council Directive 85/611/
EEC on the Coordination of Laws, Regulations and Administrative Provisions Relating to Undertakings for Collective Investment
in Transferable Securities (UCITS) With a View to Regulating Management Companies and Simplified Prospectuses [2002] OJ
L41/20.
7 Committee of European Securities Regulators, CESR’s Technical Advice at Level 2 on the Format and Content of Key Information
Document Disclosures for UCITS (Consultation Paper, Committee of European Securities Regulators, 8 July 2009) (CESR
Consultation Paper).
8 ibid 3.
9 ibid 4.
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approach has now been extended to all ‘packaged retail investment and insurance-based
products’.
The introduction of the KID was described as a ‘radical attempt to address these
shortcomings by giving management companies more scope to produce a document that
is readily understandable by the average retail investor’.10 Its design drew on the
experience of a number of jurisdictions, including the Key Features Document in the
United Kingdom (as well as the then-proposed KeyFacts Quick Guide), the Financial
Information Leaflet Regime in the Netherlands and proposed reforms in the United
States and Canada.11 Market research by IFF Research and YouGov (the ‘Research
Report’) subsequently revealed that consumers and intermediaries considered the ‘key
investor information’ document to be an improvement on the pre-sales information that
was then available,12 partly because it was short and more likely to be read.13
When the KID was first proposed, it was recognized that other measures would be
needed to allow investors to make informed investment decisions and that it would have
to operate alongside these measures, which included good-quality financial advice and
improved levels of financial literacy.14 In particular, CESR recognized that the KID would
represent ‘a considerable enhancement of disclosures for UCITS but . . . that it [would]
not, on its own, solve the problem of informed decision-making by retail investors’.15
CESR also contemplated the possibility that industry and consumer representatives
would take steps to enhance consumer education, including providing a common
glossary of terms to overcome problems that investors had in understanding the
terminology used in financial services documents.16
Key drivers and objectives
The UCITS IV Directive makes it clear that the purpose of key investor information is to
help investors reach informed investment decisions and that it should be presented in a
short format. Further, such information ‘should contain only the essential elements for
making [informed investment] decisions’, with an emphasis on ‘clarity and simplicity of
presentation’ and comparisons of ‘costs and risk profile’.17 The Commission Regulation
highlighted the need to engage investors through ‘format, presentation and the quality
and nature of the language used’.18
The importance of risk disclosure: From the outset, it was recognized that risk disclosure
was an important element of the KID. As noted in the Commission Regulation, ‘detailed
10 ibid.
11 Document of the Services of the Commission, European Commission, Background Paper on Simplified Prospectus Workshops
15th May 2006 & 11th July 2006 (Issues Paper, European Commission, 3 May 2006) (2006 Issues Paper).
12 FF Research and YouGov, UCITS Disclosure Testing Research Report, prepared for European Commission, June 2009 (Research
Report).
13 ibid 147 [9.27].
14 CESR Consultation Paper (n 7) 5.
15 ibid. The limitations of disclosure in this regard have been widely acknowledged in other jurisdictions.
16 ibid 14.
17 UCITS IV Directive (n 4) [59].
18 Commission Regulation [4].
216
rules’ were laid down ‘on the presentation of the risk and reward profile of [an]
investment, by requiring use of a synthetic indicator and specifying the content of
narrative explanations of the indicator itself and risks which [were] not captured by the
indicator’.19 The Regulation left it for the management company to decide on a case-bycase basis which ‘specific risks’ should be disclosed ‘by analysing the particular
characteristics of each fund, bearing in mind the need to avoid over-burdening the
document with information that retail investors [would] find difficult to understand’.20
The use of a synthetic risk indicator had been strongly supported in the results of market
testing, as reported in the Research Report.21 Additionally, ‘[f]indings from . . . the consumer
testing exercise revealed that investors [seemed] to be more confident in their ability to
compare funds and assess their level of risk when they [were] provided with the synthetic risk
indicator’.22 It was additionally noted that the synthetic indicator was strongly preferred over
a ‘purely narrative approach’, with respondents citing the ‘visual nature of the indicator’
which was less intimidating and easier to understand for ‘non-experienced investors’.23
However, the use of such indicators has not been without its critics. For example, in a
report dated 23 January 2014, the Joint Associations Committee on Retail Structured
Products (the ‘JAC Report’) expressed ‘strong reservations’ regarding the use of a summary
risk reward indicator (SRRI).24 Among those reservations were that investors placed too
much reliance on the indicators at the expense of other warnings, that the risk of a product
was often investor-specific; that adopting a consistent SRRI methodology across diverse
products was a significant (or impossible) challenge and that where no past performance
data exists, the indicator could not be accurate. Furthermore, the JAC Report noted the
large amount of space taken up by such a synthetic indicator in the context of a disclosure
document already limited in size. Such space, it argued, could be filled with ‘more
meaningful disclosure of the actual risks involved in the product’.25 Whether synthetic risk
indicators such as the SRRI effectively resolve the tension between achieving adequate
disclosure on the one hand, and enhancing the ability of retail investors to comprehend the
information on the other hand, is the subject of continuing discussion.
Recent developments: Under a new regulation adopted by the European Parliament on
15 April 2014,26 a three-page KID will apply to all packaged retail and insurance-based
investment products (PRIIPs). In order to give PRIIPs issuers and persons advising on or
19 Commission Regulation [6]. See also CESR Consultation Paper, 22 for an analysis of the use of a synthetic risk indicator. By
way of example, the synthetic risk indicator that the EU uses for a UCITS KID consists of a risk and reward profile on a scale of 1 to
7, with 1 representing the lowest risk (and lowest reward) and 7 representing the highest risk (and highest reward).
20 Commission Regulation [6].
21 Research Report (n 12) 152 [10.9].
22 CESR Consultation Paper 22.
23 ibid.
24 The Joint Associations Committee on Retail Structured Products, PRIPs Trilogue Issues (Submission to the European Council
and European Commission, 23 January 2014) 9 (JAC Report).
25 ibid.
26 Regulation (EU) No . . ./2014 of the European Parliament and of the Council on Key Information Documents for Packaged
Retail and Insurance Based Investment Products (PRIIPs), adopted by the European Parliament on 15 April 2014 (PRIIPs
Regulation). This came into force on 29 December 2014 and will apply in all Member States from 31 December 2016.
217
selling PRIIPs sufficient time to prepare for the practical application of the requirements,
the requirements under the PRIIPs Regulation will not become applicable until 2 years
after the regulation comes into force. UCITS have a transitional period of 5 years before
they become subject to the PRIIPs Regulation.
A PRIIP is defined as any product that falls within the definition of a ‘packaged retail
investment product’ (or ‘PRIP’) or an ‘insurance-based investment product’.27 A PRIP is
defined as:
an investment, including instruments issued by [special purpose vehicles] . . ., where, regardless of the
legal form of the investment, the amount repayable to the investor is subject to fluctuations because of
exposure to reference values or to the performance of one or more assets which are not directly
purchased by the investor.
An ‘insurance-based investment product’ is defined as ‘an insurance product which offers
a maturity or surrender value and where that maturity or surrender value is wholly or
partially exposed, directly or indirectly, to market fluctuations’.
The decision to extend the short-form disclosure regime to a broader range of
products beyond UCITS was driven by concerns that ‘product disclosure rules had added
unnecessary costs for firms and created complexity for consumers’.28 In part, this was
because of research suggesting that providing too much information could lead to poor
decision-making on the part of retail investors.29 Members of the Committee on
Economic and Monetary Affairs of the European Parliament (‘ECON’) had suggested in
2013 that the PRIPs proposal should extend to shares and bonds as well, but this was
abandoned in a vote on 21 October 2013.30
Australia
Background
As in other jurisdictions, the adoption of short-form disclosure documents in Australia
was driven by challenges facing retail investors, including asymmetric information and
differences in levels of financial literacy.31 The move was prompted by the fallout from
the Global Financial Crisis, particularly problems relating to margin lending facilities. As
seen in the collapse of high-profile investment firms such as Opes Prime and Storm
Financial, such facilities had previously not been regulated as financial products and had
therefore not been subject to the disclosure requirements for financial products. The
Ripoll Report noted that it had received submissions to the effect that disclosure had
become excessive and too compliance-focused.32 In 2008, the Labor government set up
27 ibid art 4(a)–(ab).
28 Samuel Dale, ‘FCA Admits Costly Disclosure Rules Have Failed Advisers and Consumers’ Money Marketing (10 October 2013)
5http://www.moneymarketing.co.uk/2001422.article4.
29 See, eg, Kristine Erta and others, ‘Applying Behavioural Economics at the Financial Conduct Authority’ (Occasional Paper No
1, Financial Conduct Authority, April 2013).
30 For products that fall outside the scope of the PRIIPs Regulation, see PRIIPs Regulation recital [7], art 2.
31 Regulatory Impact Statement, Corporations Amendment Regulations 2010 (No 5) (Cth) [2].
32 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Report on Inquiry into
Financial Products and Services in Australia (November 2009) (Ripoll Report).
218
the Financial Services Working Group (FSWG) to ‘slash the lengthy, complex and
unreadable disclosure documentation’.33 This led to regulations that introduced a
tailored disclosure regime for certain products; namely, superannuation products, simple
managed investment schemes and standard margin lending facilities (the ‘tailored regime’
or ‘Regulations’).34
Although it is likely that the FSWG considered the experience from other jurisdictions
in designing the tailored regime, the outcome was quite different from the summary
short-form disclosure documents that other jurisdictions had adopted. In place of the
long-form disclosure documents for the relevant products, Australia adopted a shortform disclosure document, known as the ‘shorter’ Product Disclosure Statement (PDS),
which contains all of the prescribed information and incorporates additional information
by reference. Under this technique, ‘[a]ny information that is incorporated by reference
into the PDS is taken to be included in the PDS and is therefore subject to all provisions
relating to a PDS’.35 It also means that the full range of liability and enforcement
provisions of the law apply to it.36
The move towards the tailored regime was partly driven by high-profile collapses of
financial firms,37 and partly by concerns, supported by qualitative research, that ‘the
PDSs currently being produced and provided to consumers [were] not fully effective in
conveying the key product information to assist consumers to make informed choices’.38
The research showed that consumers found fund PDSs ‘disengaging and containing too
much unnecessary information’, with the language ‘difficult to understand’ and resulting
in consumers ‘not necessarily relying on the PDS when choosing a fund’.39
In addition, as noted in the Regulatory Impact Statement (RIS), there had been a
‘tendency for suppliers of financial products to provide excessive information’.40 Further
criticisms included the significant variance in the length, design, structure, technical
language and presentation of PDSs.41 Such evidence suggested that ‘the current
33 Minister of Finance and Deregulation and the Minister for Superannuation and Corporate Law, ‘Complexity to be Tackled in
Financial Services Working Group to Start Immediately’ (Joint Media Release, 5 February 2008).
34 Corporations Amendment Regulations 2010 (No 5) (Cth).
35 Australian Securities and Investments Commission, Disclosure: Product Disclosure Statements (and Other Disclosure
Obligations) (Regulatory Guide No 168, Australian Securities and Investments Commission, 6 September 2010) 110 (RG 168).
See also Australian Securities and Investments Commission, Shorter PDSs: Complying With Requirements for Superannuation
Products and Simple Managed Investment Schemes (Information Sheet No 155, Australian Securities and Investments Commission,
November 2013) 3 (IS 155): ‘[s]ome material is required or permitted to be located separately from the primary document, with a
reference to be included in the primary document telling readers where they can find this information: see regs 7.9.11P and 7.9.11X
of the Corporation’s Regulations. This mechanism is called ‘‘incorporation by reference’’ and is an important means by which the
primary document can be kept short and concise, while providing full information elsewhere for those consumers who wish to read
it.’
36 IS 155.
37 See Regulatory Impact Statement, Corporations Amendment Regulations 2010 (No 5) (Cth) [24]–[25] for the need to have
‘clearer articulation of key risks’ in relation to margin lending facilities.
38 ibid [11], citing Wallis Consulting Group, Report for the Investment and Financial Services Association Ltd (Research Report,
March 2008).
39 ibid [12].
40 ibid [8].
41 ibid.
219
framework [did] not allow for comparability across products because of heterogeneity in
the way information and content [was] presented’.42
Another factor contributing to the tailored regime was risk aversion on the part of PDS
issuers. Such aversion was a result of the need to ensure compliance with their disclosure
obligations, with the resulting tendency being to include more information rather than
less. A further factor was the difficulty and uncertainty in interpreting the disclosure
obligations (including how to achieve the ‘clear, concise and effective’ standard) and the
need to protect the issuer against potential liability claims.43 It was considered that these
problems could be ‘addressed by government action supporting better regulatory balance
which [promoted] lower compliance costs and better arrangements to support more
effective disclosures in PDSs’.44
The RIS noted the expectation that consumers would ‘be in a better position to make
informed investment decisions about whether to acquire a particular financial product’.
This was because ‘consumers [would] receive simpler, more readable and standardised
PDSs that [would] facilitate decisions and comparisons across similar products’.45
Further, ‘[a] shorter document [would] be more user-friendly, so consumers [would be]
more likely to engage with the PDS’.46 As stated in the relevant Information Sheets, the
key objectives of the tailored regime include inserting ‘prescribed section headings to
make it easier for consumers to find important information in the PDS and compare
across products’ and ‘key content requirements to ensure that consumers are provided
with the key information they need to make an investment decision’ so that consumers
may ‘engage with disclosure documents and better understand their financial products’ in
a format that is ‘consumer friendly and easy to read’.47
The RIS recognized that ‘even in cases where the presentation of financial information
is succinct and [accessible], potential investors approach investment decisions with
different levels of financial literacy’.48 As a result, disclosure should be viewed as part of a
package of measures that includes improving the quality of financial advice and investor
education.
The importance of risk disclosure: The Regulations prescribe the detailed information that
must be included in the PDS in relation to risk. In addition, the shorter PDS regime
requires PDSs to contain prominent warnings.49 In relation to the disclosure of
42 ibid [10].
43 ibid [13]. See also Andrew Godwin and Paul Rogerson, ‘Clear, Concise and Effective: The Evolution of Product Disclosure
Documents’ in Shelley Griffiths, Sheelagh McCracken and Ann Wardrop (eds), Exploring Tensions in Finance Law: Trans Tasman
Insights (Thomson Reuters 2014) 1.
44 ibid [17]. See also [85] for estimates on costs.
45 ibid [75].
46 ibid [76].
47 Australian Securities and Investments Commission, Shorter PDS Regime: Superannuation, Managed Investment Schemes and
Margin Lending (Information Sheet No 133, Australian Securities and Investments Commission, June 2012) (IS 133); IS 155 (n 35).
48 Regulatory Impact Statement, Corporations Amendment Regulations 2010 (No 5) (Cth), citing The Social Research Centre,
ANZ Survey of Adult Financial Literacy in Australia (Research Paper, The Social Research Centre and ANZ Banking Group Pty Ltd,
October 2008).
49 IS 155 (n 35) 4.
220
investment risk in superannuation funds, Information Sheet 155 encourages trustees to
disclose the standard risk measure (SRM), which is an investment risk classification
system developed by the Association of Superannuation Funds of Australia (ASFA) and
the Financial Services Council (FSC) to enable investors to compare investment options
across superannuation funds. It further recommends that funds that do not use the SRM
should explain in the primary document why this model is not being used and describe
what risk classification model has been used instead.
Other issues and proposed changes: Demonstrating the definitional challenges that arise
in relation to a highly prescriptive regime, hedge funds have been expressly excluded from
the tailored regime (specifically, from the category of ‘managed investment schemes’) on
the basis that ‘while the shorter disclosure documents work well for relatively simple
financial products, complex products often have features and risks that can’t be addressed
in a short and simple manner’.50 In October 2013, the Australian Securities and
Investments Commission (ASIC) refined the definition of a ‘hedge fund’ in line with the
approach taken in Class Order [CO 12/749] Relief from the Shorter PDS Regime and
issued a regulatory guide on improving disclosure for hedge funds.51 The exclusion was
expressed to apply ‘on a temporary basis until 22 June 2014, pending further work by the
Government on the appropriate long-term treatment of these products’52 and has now
been extended to 30 June 2015.
Hong Kong
Background
Much of the impetus for the reforms in Hong Kong was driven by the fallout in 2008
from the collapse of a structured derivative-linked product called Minibonds.53 This
triggered a process of consultation ‘on a package of proposals to strengthen the regulatory
regime with respect to investment products and conduct of intermediaries’ for ‘the three
key stages of the life of an investment: the pre-sale, sale and post-sale periods’.54
50 Minister for Financial Services & Superannuation, ‘Shorter Product Disclosure Statements’ (Media Release, No 169, 22
December 2011). The definition of a hedge fund was subsequently debated by ASIC; see esp Australian Securities and Investments
Commission, Hedge Funds: Improving Disclosure for Retail Investors (Consultation Paper No 147, Australian Securities and
Investments Commission, February 2011) 10 [15]–[17], app 2; Australian Securities and Investments Commission, Hedge Funds:
Improving Disclosure—Further Consultation (Consultation Paper No 174, Australian Securities and Investments Commission,
February 2012) 6.
51 Australian Securities and Investment Commission, Hedge Funds: Improving Disclosure (Regulatory Guide No 240, Australian
Securities and Investments Commission, October 2013) 240.3 (RG 240): ‘There are some characteristics that distinguish hedge
funds from other managed investment schemes, such as the use of leverage, derivatives and short selling, or seeking returns with a
low correlation to equity, bond or cash markets. These characteristics and other features of hedge funds, such as charging
performance fees, mean that investors in these funds can be exposed to more complex risks than investors in funds pursuing more
‘‘vanilla’’ investment strategies.’ As noted in 240.29, the guide applies to all hedge funds and funds of hedge funds, regardless of
whether the fund meets the definition of a simple managed investment scheme.
52 ibid 240.30. It is relevant to note that financial product disclosure generally is part of a broad range of issues currently being
examined by the Financial System Inquiry, which was established by the Australian Treasurer on 20 November 2013. For details of
the Inquiry and its work, see 5http://fsi.gov.au/4.
53 See Securities and Futures Commission (HK), Issues Raised by the Lehmans Minibonds Crisis: Report to the Financial Secretary
(Report, Securities and Futures Commission, December 2008) (SFC Minibonds Report).
54 Securities and Futures Commission (HK), Consultation Conclusions on Proposals to Enhance Protection for the Investing Public
(Securities and Futures Commission, May 2010) 1 (Consultation Conclusions).
221
The Consultation Conclusions included the introduction of a consolidated Securities and
Futures Commission (SFC) Handbook comprising revised product codes, a required
product key facts statement (‘Product KFS’) to summarize key features and risks of
investment products, a mandatory ‘cooling-off’ or ‘unwind’ period for certain unlisted
structured investment products and new requirements regarding intermediaries’ conduct
and selling practices relating to the sale of investment products.55
The SFC drew on the experience in other jurisdictions, including the UK, the EU and
Australia. In particular, the format of the Product KFS template was based on the draft KID
issued by the CESR in February 2008 ‘with an aim to better align the presentation of the
[Product KFS] and KID to facilitate comparability of the two documents and reduce nonsubstantive differences between the two forms’.56 Comparability between the Product KFS and
the KID is relevant as EU-domiciled funds are currently marketed and sold in Hong Kong.
The requirement to produce a Product KFS applies to fund products, investmentlinked assurance scheme products and unlisted structured investment products.
As noted in the Consultation Conclusions, the principles contained in the Handbook are
to apply across various product types, and are intended to enhance product transparency
and to set an overall disclosure standard for all offering documents.57 Specifically, they
‘are intended to serve as concise product summaries, written in plain language, [as]
feedback indicated . . . this would help investors understand the key features and risks of
investment products’.58 It is clear that standardization of Product KFSs to facilitate
comparison across products together with simplification and readability were key drivers
behind the reforms in Hong Kong.59 While it is recognized that Product KFSs cannot
‘substitute for the full information contained in an offer document’, it is nevertheless
expected that they ‘will prove to be effective in ensuring that a product’s key features and
risks are communicated to investors’.60
The importance of risk disclosure: In prescribing a document that summarizes the key
features and risk of financial products, the reforms recognize the importance of risk
disclosure and the need to give equal prominence to features and risks. In particular, the
Handbook requires all Product KFSs to ‘carry a prominent upfront warning statement on
their first page . . . that the [Product KFS] is a part of the offering document (where
applicable) and [investors] should not invest in the product based on the [Product KFS]
alone’.61 In relation to the offering document, the Handbook requires that ‘[a]ll key
55 ibid 1 [4].
56 ibid 56 [243]. See also Securities and Futures Commission (HK), Consultation Paper on Proposals to Enhance Protection for the
Investing Public (Consultation Paper, Securities and Futures Commission, September 2009) [164] (Consultation Paper).
57 Consultation Conclusions (n 54) 5 [9].
58 ibid [11].
59 See Consultation Paper (n 56) 8–9 [165], [168].
60 ibid.
61 Securities and Futures Commission (HK), Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes
and Unlisted Structured Investment Products (Handbook, Securities and Futures Commission, 25 June 2010) [6.8] (Handbook).
222
features and risks of the product [be] highlighted for investors prominently in a succinct
manner’.62
Other issues and proposed changes: The Consultation Conclusions referred to two issues
that were relevant for the purposes of the cross-country comparison in this article: first,
whether incorporation by reference should be adopted; and secondly, whether the
Product KFS should be physically part of the offering document instead of a separate
document. In relation to the first issue, the SFC stated in the Consultation Conclusions
that there were ‘merits in this proposal as it would result in shorter offering documents
and facilitate the presentation of information to retail investors in a manner which may
better suit their needs’.63 However, such proposals needed to ensure that investors were
given sufficient notice of the incorporated information, and that those investors who
wished to study the additional materials should be able to do so from an easily available
source and free of charge. It was acknowledged that adopting such a mechanism could
potentially have a wide range of implications across the spectrum of products offered to
the public, and may not be possible without legislative change.64
In relation to the second issue, the SFC noted the concern that ‘if the Product KFS
were required to be physically bound together with the other parts of offering documents,
then the offering documents would become very bulky and not user-friendly, thus
defeating the original purpose of introducing the Product KFS’.65 Such a concern is
consistent with qualitative research showing that consumers do not always read
everything they are given, and that comprehension levels are far from perfect.66
Singapore
Background
As in Hong Kong, the reforms in Singapore were heavily influenced by the fallout from
the collapse of Minibonds in 2008 and the global financial crisis generally.67 This led to
proposals in a Consultation Paper by the Monetary Authority of Singapore (MAS), the
focus of which was on ‘the regulatory regime for unlisted investment products that [were]
commonly sold to retail investors’.68 Following the MAS Consultation Paper, a
workgroup was formed to develop the content and format of the Product Highlights
62 ibid note to [6.4].
63 Consultation Conclusions (n 54) 21 [95].
64 ibid.
65 ibid [241].
66 See esp Godwin and Rogerson (n 43) 40 citing Paul O’Shea and Dr Carmel Finn, ‘Consumer Credit Code Disclosure: Does it
Work?’ (2006) 16 J Bank Financ L Pract 5; Australian Securities and Investments Commission, Australian Investors: At a Glance
(Report No 121, Australian Securities and Investments Commission, April 2008).
67 Monetary Authority of Singapore, Consultation Paper on Review of the Regulatory Regime Governing the Sale and Marketing of
Unlisted Investment Products (Consultation Paper, Monetary Authority of Singapore, 12 March 2009) [1.1.1] (MAS Consultation
Paper).
68 ibid 4.
223
Sheet (PHS). The ‘clear, concise and effective’ standard was adopted, though tailored for
different types of unlisted investment product.69
In formulating the reforms, the MAS considered developments in the US, the EU and
Australia.70 In addition to introducing enhanced requirements for unlisted investment
products, the MAS Consultation Paper floated a proposal ‘specific to the sale and
marketing of complex investment products . . . [a concept] derived from the EU Markets
in Financial Instruments Directive (MiFID)’.71 The proposal was that complex
investment products would be subject to an enhanced sale and marketing regulatory
regime.72 Under the proposed regime, complex investment products could only be sold
to investors with financial advice and issuers would be required to include a health
warning in both the prospectus and the PHS and all marketing and advertising materials
that the product being offered was a complex investment product.73 This was similar to
recommendations by the Hong Kong Monetary Authority in its Report on Issues
Concerning the Distribution of Structured Products Connected to Lehman Group
Companies (2008) that ‘health warnings’ be attached to retail structured products with
embedded derivatives or retail derivative products generally’.74 However, the proposal to
introduce the concept of a complex investment product was later shelved and replaced
with ‘a revised package of proposals to enhance safeguards for retail investors for a wider
range of investment products’.75
The requirement to produce a Product Highlights Sheet applies to asset-backed
securities and structured notes where the offer is made in or accompanied by a
prospectus, and also unlisted collective investment schemes and exchange traded funds
where the offer is made in or accompanied by a prospectus.
The three aims of the proposals in the MAS Consultation Paper were to promote more
effective disclosure by improving the quality of information available to investors,
strengthen fair dealing in the sale and advisory process and enhance MAS’ powers under
the Financial Advisers Act (Cap 110).76 A short-form disclosure document in the form of
the PHS was seen as necessary, due to ‘a generally held view that the prospectus [had]
been largely ineffective as a primary disclosure document in helping investors make
informed investment decisions’. This was because ‘[i]nvestors [found] prospectuses
69 Monetary Authority of Singapore, Response to Feedback Received—Policy Consultation on Review of the Regulatory Regime
Governing the Sale and Marketing of Unlisted Investment Products—(Part I) (2009) [3.1] (Response 1).
70 MAS Consultation Paper (n 67) [3.1.3]–[3.1.6].
71 ibid 10.
72 ibid 4.
73 ibid 33. As noted in [5.3.1]: ‘[u]nder the EU MiFID and UK regulatory models, ‘‘complex products’’ may be sold without
advice to retail investors only upon the distributor having first performed an appropriateness test to determine if the investor has
the appropriate knowledge and experience to purchase the product.’
74 ibid [5.4.1]–[5.4.2].
75 Monetary Authority of Singapore, Response to Feedback Received—Policy Consultation on Review of the Regulatory Regime
Governing the Sale and Marketing of Unlisted Investment Products—(Part II) 6 (Response 2): ‘These proposals [were] set out in the
Consultation Paper on Regulatory Regime for Listed and Unlisted Investment Products published on 28 January 2010.’
76 MAS Consultation Paper (n 67) 4.
224
difficult to read and understand as they [tended] to be drafted in a legalistic manner’.
Further, ‘[t]he length of some prospectuses may even deter investors from reading them
at all’.77 As a result, and ‘having considered the experiences of overseas jurisdictions and
the merits of a separate simplified disclosure document’, MAS proposed the PHS to
supplement the prospectus. The prospectus was to contain all information an investor
‘would reasonably require’ for an investment decision, while the PHS served to highlight
the key information ‘in a clear, concise and effective manner’.78 The PHS would need to
be given with the prospectus to investors before they made investment decisions.
In addition to implementing the PHS, the MAS proposed specific education activities
to help investors understand how to use the PHS. These activities included the
publication of guidelines ‘to provide guidance to issuers and their professional advisers in
preparing a Product Highlights Sheet’.79 The MAS Consultation Paper noted that
adequate disclosure by the issuer to investors of the features and risks of an investment
product was one of two key elements, the other being a reasonable basis for an adviser’s
recommendation where advice is given.80
The importance of risk disclosure: As noted above, adequate disclosure to investors of the
features and risks of an investment product was one of the key elements of the PHS. In
Response 2, the MAS noted that as a result of its decision not to proceed with a
compulsory health warning, it would not proceed to implement a mandatory risk rating
framework for investment products.81
Other issues: A recent Consultation Paper proposes to extend the requirements for a
PHS to offers of securities beyond asset-backed securities, structured notes, unlisted
collective investment schemes and exchange traded funds and to allow certain
information contained in a separate document outside the prospectus to be incorporated
in it by reference to the separate document.82
Canada
Background
A summary document for mutual funds was first proposed in Canada in 2003,83 and was
subsequently introduced in 2007.84 According to the regulatory framework document
(the ‘Framework Document’), the reason for proposing a summary document was that
‘[m]any investors [had] trouble finding and understanding the information they need
77 ibid [3.1.1].
78 ibid [3.1.6].
79 ibid [3.1.11].
80 ibid [1.2.1].
81 Response 2 (n 75) 6–7.
82 Monetary Authority of Singapore, Policy Consultation on Proposals to Facilitate Better Understanding of Prospectuses
(Consultation Paper No P015-2013, Monetary Authority of Singapore, October 2013) [2.2.1] (2013 Consultation Paper).
83 Joint Forum of Financial Market Regulators, Rethinking Point of Sale Disclosure for Segregated Funds and Mutual Funds
(Consultation Paper No 81-403, Joint Forum of Financial Market Regulators, 13 February 2003).
84 Joint Forum of Financial Market Regulators, Point of Sale Disclosure for Mutual Funds and Segregated Funds (Proposed
Framework No 81-406, Joint Forum of Financial Market Regulators, 15 June 2007) (Proposed Framework).
225
because it [was] buried in the simplified prospectus for mutual funds and in the
information folder and insurance contract for segregated funds’.85 Further, these
documents tended to be ‘long and complex’, with investors finding it difficult to compare
information across different funds, and additional research indicating that many
investors did not use the information when making purchase decisions.86
The regulators drew broadly on the experience in other jurisdictions, reviewing ‘many
research studies and academic papers from around the world to understand how
investors make investment decisions and what information they want to make a
decision’.87
The Framework Document outlines the three key principles underpinning the vision of
the regulators: providing investors with key information about a fund; providing the
information in a simple, accessible and comparable format; and providing the
information before investors make their decision to buy. It also notes a desire to give
investors ‘a basic and correct understanding of the potential benefits, risks and costs’ of a
particular fund and the ability ‘to meaningfully compare one fund with another’.88 It also
provides a succinct outline of the Fund Facts document, namely that it is ‘in plain
language, fits on both sides of one page and highlights key information that is important
to investors, including performance, risk and cost’. For the sake of ‘comparability and
simplicity’, many formatting aspects are prescribed, though specific content of some
items ‘will be left to fund managers and insurers to determine’.89
Testing of the Fund Facts was conducted in 2006, in relation to both mutual funds and
segregated funds. According to the relevant research report, the Fund Facts documents
were ‘very well received’ by the investors and advisers who were tested. Notably, the
investors described the documents as ‘informative, relevant and easy to read’, and
expressed the desire to see the document ‘before [making] a decision to invest’. Similarly,
the advisers were disposed to use it ‘as a presale document’ that would assist in explaining
the financial products.90
The importance of risk disclosure: The Proposed Framework recognizes the need to
communicate risk to retail investors. As noted above, emphasis is placed on the
importance for investors to have a ‘basic and correct understanding of the potential
benefits, risks and costs of investing in a fund and to be able to meaningfully compare
85 Joint Forum of Financial Market Regulators, Framework 81-406: Point of Sale Disclosure for Mutual Funds and Segregated Funds
(Framework Document, Joint Forum of Financial Market Regulators, 24 October 2008) 10482 (Framework Document).
86 ibid. Another reason for proposing a summary document was to harmonize disclosure for mutual and segregated funds (often
referred to as a ‘mutual fund with insurance wrapper’): Interview with Ontario Securities Commission (Telephone Interview, 16
January 2013).
87 Proposed Framework (n 84) 6–8. See Appendix 4 of the Proposed Framework for a list of the research studies and academic
papers.
88 Framework Document (n 85) 10481.
89 ibid.
90 Proposed Framework (n 84) 5–6. See also Appendix 5: Research Strategy Group, Fund Facts Document Research Report
(Research Report, Research Strategy Group and Ontario Securities Commission, 2007).
226
one fund with another’.91 In addition, an explanation of ‘volatility’ has been added to the
risk section to provide greater explanation of the risk scale that is required to be included
in the Fund Facts document.92
The Canadian Securities Administrator has published for comment a proposed risk
classification methodology for the use of mutual fund managers in Fund Facts
documents. This was in response to stakeholder feedback received throughout the
implementation of the point of sale disclosure framework for mutual funds, ‘notably that
a standardized risk classification methodology . . . would be more useful to investors as it
would provide a consistent and comparable basis for measuring the risk of different
mutual funds’.93
Other issues: The Framework Document also notes that ‘[i]nsurance and securities
regulators are strongly committed to the key principles and will consider their
applicability to other securities and insurance products’.94
New Zealand
Background
Pending the reforms that will be introduced by the Financial Markets Conduct Act 2013
(NZ) (FMC Act), the position in New Zealand reflects the conventional disclosure
framework, where disclosure takes the form of a prospectus and an investment statement.
The perceived weakness with this regime is that prospectuses and investment statements
fail ‘to adequately inform investors, as they [tend] to be poorly structured, too long, and
unclear’. The impact of this is that investors cannot make ‘informed decisions’ or do not
‘participate in the market at all’.95 This resonates with the experience in the EU and
Canada in relation to simplified prospectuses.
Under the reforms to be introduced by the FMC Act, the investment statement and
prospectuses will be replaced with the requirement to prepare a Product Disclosure
Statement (PDS), the purpose of which is ‘to provide certain information that is likely to
assist a prudent but non-expert person to decide whether or not to acquire the financial
products’.96 A Discussion Paper by the Ministry of Business, Innovation and
Employment (MBIE) notes that the PDS will be short and highly prescribed for
mainstream products, and will consist of two parts:
a key information summary of around 1–2 pages that summarises the key features of the investment and
risks associated with it; and a more detailed description of information that is essential to an investor’s
91 Proposed Framework (n 84) 1.
92 ibid 7.
93 Canadian Securities Administrators, Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts (Notice
No 81-324 and Request for Comment, Canadian Securities Administrators/Autorite´s canadiennes en valeurs mobilie`res,12
December 2014) 11849.
94 Framework Document (n 85) 10481. The regulators are considering applying the summary disclosure approach to exchangetraded funds. However, there are concerns about applying it to a broader range of products: Interview with Ontario Securities
Commission (Telephone Interview, 16 January 2014).
95 Regulatory Impact Statement, Financial Markets Conduct Bill 2013 (NZ) [14].
96 Financial Markets Conduct Act 2013 (NZ) s 49.
227
decision. The key information summary will be ‘much more standardised in content and presentation
than the investment statement’.97
The new PDS regime will come into effect on 1 December 2014, with a 2-year transition
where issuers can choose to offer under the old or new regime. MBIE is currently
consulting on the Draft Regulations.
The Discussion Paper notes that experiences in both New Zealand and overseas
markets were considered in formulating the reforms. These markets included the EU,
Australia, Canada and the USA.98 It was also noted that earlier in 2009, the Securities and
Exchange Commission (SEC) in the USA had adopted changes that require funds to
include a key information summary section at the front of the full prospectus.99
Under the reforms, New Zealand will adopt a comprehensive approach, where the
requirement to produce a key information summary will apply to all financial products.
An important difference with the approach in other jurisdictions is that the key
information summary will not be a stand-alone document but will appear at the front of
the PDS.
As in other jurisdictions, comparability has been identified as a goal of key information
summaries. As noted in the Discussion Paper, ‘[d]isclosure should assist investors to
compare products and enable them to identify which products best align with their
financial needs and goals’.100
One of the principal objectives behind the decision to adopt a short-form information
summary at the front of the PDS is to ‘aid investor comprehension of the key points of
the product’ in prescribing the content of the information summary and limiting its
length.101 As noted in the Discussion Paper, the most important element of the PDS is
‘[t]he opening text of the key information summary’, as it is potentially the only
disclosure a potential investor may read before subscribing to an offer.102
The importance of risk disclosure: As noted above, the purpose of the key information
summary is to summarize both the key features of the investment and the risks associated
with it. Draft disclosure requirements set out the information concerning risk that is
required to be included in the PDS. In addition, mock-ups prepared by MBIE include
reference to the key risks, with the mock-up for managed funds including a risk–reward
indicator on a scale of 1–7.
97 Ministry of Business, Innovation and Employment (NZ), Financial Markets Conduct Regulations (Discussion Paper, Ministry
of Business, Innovation and Employment, December 2012) [14] (Discussion Paper).
98 ibid 12; Capital Market Development Taskforce, Capital Markets Matter: Report of the Capital Market Development Taskforce
(Report Paper, Capital Markets Development Taskforce, December 2009) (Taskforce Report); Regulatory Impact Statement,
Financial Markets Conduct Bill 2013 (NZ) [21]–[22], [45]–[46].
99 Taskforce Report (n 98) 31.
100 Discussion Paper, 12.
101 ibid [26].
102 ibid [27].
228
Other issues: An interesting reform adopted in New Zealand is an investor website ‘that
enables investors to easily get information about and compare investment options’.103
According to the Taskforce Report, the website will allow investment products to be
searched by type, risk level, minimum amount, fees and other categories. An analogy, not
unfamiliar to Australia, is drawn to realestate.co.nz which allows potential home buyers
to search for property according to their specifications. The Report notes the importance
of the website being ‘independently funded and maintained to avoid any perceptions or
fact of conflict, with an option floated to fund the website by a levy on investment
products, hence investors providing the funding’.104
3. Findings from the comparative analysis
The shortcomings of the conventional approach to disclosure
There is widespread recognition in all jurisdictions of the concerns associated with the
conventional approach to disclosure.105 These concerns have arisen as a result of the
requirement to provide investors with all of the information that they need in order to make
an informed investment decision and have led to an increase in the length of disclosure
documents and the use of technical terminology.106 This in turn has triggered concerns about
the impact of the length and content of disclosure documents on the readability or
‘accessibility’ of disclosure documents to retail investors, and has underpinned the rationale
behind the trend towards prescribing the maximum length of disclosure documents and also
the manner in which information is presented and expressed.
The purpose and content of short-form disclosure documents
The findings indicate that the purpose of the short-form document will, to a significant
extent, determine the content requirements and how comprehensive the content can be.
An overriding question is whether it should contain all of the information on which a
reasonable investor should be expected to rely in order to make an informed investment
decision, or just a summary of the key features or facts.
In this regard, it is relevant to note the recommendation in the IOSCO Consultation
Report that robust disclosure standards should require that ‘issuers’ disclosure be
consistent with issuers’ understanding of the intended investors’ capacity to understand
the disclosure’.107 The implication here is that the focus of disclosure should be on
drawing the investor’s attention to the features and risks of a product in broad terms, so
that the investor can determine appropriateness and suitability, rather than on providing
comprehensive information as a basis on which the investor can make an informed
decision.
103 Taskforce Report, 31.
104 ibid.
105 See, eg, Godwin and Rogerson (n 43) 7–8.
106 As noted by the UK Financial Conduct Authority, ‘regulators and investors have a jaundiced view of disclosure practice
because it has traditionally been badly written and badly structured. In addition, there have been difficulties in distinguishing
between marketing and disclosure documents’: Interview with Financial Conduct Authority (UK) (London, 26 September 2013).
107 IOSCO Consultation Paper (n 1) 46.
229
Three possibilities can be identified in terms of the purpose of the short-form
disclosure document. The first is as a substitute for the prospectus or formal disclosure
document (eg, Australia). The second is a summary statement that is part of the formal
disclosure document and therefore part of the liability regime that applies to the formal
disclosure document (eg, Hong Kong, Canada and New Zealand). The third is a
summary statement that exists on a stand-alone basis, not forming part of the formal
disclosure document and therefore not subject to its liability regime (eg, Singapore and
the EU). With the exception of New Zealand, where the summary document is physically
part of the disclosure document, all jurisdictions have adopted a separate short-form
document that is not physically part of a longer disclosure document.
In Australia, the short-form disclosure document takes the place of the long-form
disclosure document in relation to the products that are subject to the relevant regulatory
framework. This has been possible through the mechanism of incorporation by reference.
Although embraced in Australia, the mechanism of incorporation by reference has been
the subject of debate in jurisdictions like Hong Kong as to the merits of this approach and
whether it meets the needs of investors, particularly in terms of ensuring easy access to
information.
Other questions arise in relation to purpose. For example, in addition to acting as a
disclosure document for investors, should the document be targeted at financial advisers
and facilitate their provision of advice to investors? Some jurisdictions, such as Canada,
have expressly recognized the importance of short-form disclosure documents as an aid
for financial advisers in helping to explain financial products to clients.
The purpose of the short-form document will also affect its length, liability and
language, each of which is discussed below.
The length of short-form disclosure documents
A key factor behind the length requirements is ‘readability’; namely, the need for
disclosure documents to be presented in a format that is easy for retail investors to read
and understand. Research on investor behaviour has suggested that retail investors are
not likely to read documents that are more than two or three pages in length.108 In
addition, prescribing a maximum length has been seen as a way of overcoming the
traditional tendency for disclosure documents to get longer as product issuers and their
lawyers sought to include more information in order to reduce liability concerns.
Although there is general consensus concerning the importance of length, there is
divergence between jurisdictions in terms of the maximum page length, with Australia
permitting a maximum page length of eight pages for superannuation and managed
investment schemes.109 In both Hong Kong and Singapore, the length requirement is
expressed more as an expectation than as a hard-and-fast rule. For example, in Hong
108 See, eg, CESR Consultation Paper (n 7).
109 To a significant extent, this reflects the fact that in Australia, the short-form document operates as a substitute for the longform disclosure document. The purpose of the short-form disclosure document thus becomes relevant to the question of length, in
addition to content.
230
Kong the Product KFS is expected to be no more than four pages, while graphics and
diagrams are included in the page limit where applicable.110 In Australia, however,
industry associations had expressed concerns in relation to the difficulties of having
maximum page length restrictions, particularly for more complex products. It was in
response to these concerns that the maximum number of pages for superannuation and
managed investment schemes was increased from six pages to eight pages.111 This is
considerably longer than the prescribed maximum page length in other jurisdictions and
appears to be inconsistent with research suggesting that retail investors are not likely to
read documents that are more than two or three pages in length.
Whatever the prescribed maximum might be, the shift in all jurisdictions towards a
maximum limit, on either a mandatory or recommended basis, has required a highly
prescriptive approach in relation to content.
The liability that attaches to the short-form disclosure document
Liability is a critical question that goes to the issue of purpose, content and also language
(such as whether the use of technical language can be avoided or reduced). A related
question is whether the short-form disclosure document is part of the formal disclosure
document, and therefore subject to its statutory liability regime, or whether it has its own,
more limited, liability regime. For example, does statutory liability arise only where the
document is misleading, inaccurate or inconsistent when read with the formal disclosure
document and only on the part of the person who prepared the document? Or does it
involve ‘full prospectus liability’, under which the issuer, its directors and any person who
has made or consented to a statement in the disclosure document will be liable for loss or
damage suffered by investors as a result of a defective disclosure document?112
It might be argued that the more limited the liability implications, the more likely it is
that the product issuer will tailor the document in a way that the retail investor can
understand. It might also be argued that if the short-form disclosure document is part of
the formal disclosure document and the purpose of the disclosure document is to provide
the investor with the necessary information to enable an informed investment decision,
there will be a greater risk that technical language will be used to overcome liability
concerns, thereby reducing the readability of the short-form disclosure document and
undermining the purpose for which it was prepared in the first place.
To some extent, these concerns are alleviated in circumstances where the content of
the disclosure document is prescribed; in other words, where the disclosure document
only needs to contain the information that is prescribed and there is no general disclosure
requirement to include such information as is necessary to enable the investor to make an
informed investment decision. That said, there is still an argument that making the shortform disclosure document part of, or a substitute for, the formal disclosure document
110 Handbook (n 61) [6.7] note (2).
111 Regulatory Impact Statement, Corporations Amendment Regulations 2010 (No 5) (Cth) [105].
112 It is relevant to note that liability in tort may arise independently of statutory liability (eg on the basis of negligent
misstatement) and that such liability can be created inadvertently.
231
will lead to the use of legalistic language and technical terms. As noted above, the
jurisdictions in which the short-form document is either part of or operates as the formal
disclosure document (and is therefore subject to its liability regime) include Hong Kong,
Canada, Australia and New Zealand. In Singapore and the EU, on the other hand, the
short-form disclosure document operates on a stand-alone basis in that it is neither part
of, nor incorporated by reference into, the formal disclosure document. Accordingly, it is
subject to its own liability regime.
The language and presentation of short-form disclosure documents
All jurisdictions prescribe a disclosure standard in terms of the language that is used or
the manner in which disclosure is written or presented:
‘clear, concise and effective manner’ (Australia, Hong Kong and New Zealand).
‘clear and simple language’ (Singapore).
‘concise manner and in non-technical language’ (EU as currently applying to UCITS).
‘clearly expressed and written in language . . . that is clear, succinct and comprehensible’ (EU under the
new regulation for PRIIPS).
‘concisely and in plain language’ (Canada).
Some jurisdictions additionally link the disclosure standard to the ability of retail
investors to understand. For example, information should be disclosed ‘in such manner
as to be readily understood by the investing public’ (Hong Kong),113 or ‘in clear and
simple language that investors can easily understand’ (Singapore).114 Under the new
regulation in the EU, PRIIPS are required to be ‘written in language and a style that
communicate[s] in a way that facilitates the understanding of the information’.115 In
Canada, ‘‘‘plain language’’ means language that can be understood by a reasonable
person, applying a reasonable effort’.116 This reference to the ‘reasonable person’ appears
logical. As noted by Burn, ‘[a]t best, an issuer . . . can only prepare a summary disclosure
document on the basis of an ‘‘average’’ retail investor’.117
Additional considerations
The name of short-form disclosure documents: There are a number of factors that come
into play in determining the name given to a short-form disclosure document. To a large
extent this will reflect the purpose. For example, if it operates as a substitute for the longform disclosure document as in Australia, logic would suggest that it should have the
same name (eg, Product Disclosure Statement). If, on the other hand, it acts as a
summary document or a ‘quick read’, the name is likely to reflect its status as such [eg,
Key Information Document (EU), Product Key Facts Statement (Hong Kong), Product
Highlights Sheet (Singapore), Fund Facts (Canada) and Information Summary (New
Zealand)].
113
114
115
116
117
Handbook (n 61) [6.1].
MAS Consultation Paper (n 67) [3.4].
Commission Regulation (n 5) art 6(3)(b).
Securities Act, National Instrument 81-101, Mutual Fund Prospectus Disclosure, BC Reg 1/2000, pt 1.1.
Lachlan Burn, ‘KISS, But Tell All: Short-Form Disclosure for Retail Investors’ (2010) 5(2) CMLJ 141, 155.
232
A relevant question is whether the name implies that the document should provide a
sufficient basis on which investors can make an informed decision or whether it should
draw the attention of investors to the existence of the comprehensive disclosure
document. The EU and Hong Kong arguably fall into the former category as the names,
which include the adjective ‘key’, might create the impression that the documents contain
all of the key facts or key information on which investors will need to rely to make an
informed decision. This raises a query about whether this is the correct impression to
create in the minds of investors despite warnings to the effect that investors should not
invest in the product based on the short-form disclosure document alone.
Market research also suggests that the choice of the acronym is a relevant
consideration. In the EU, the CESR proposed renaming the disclosure document to
the KID, ‘as feedback from stakeholders . . . suggested that KII [from Key Investment
Information] [was] an awkward acronym’.118
The scope of products subject to the short-form disclosure document: An ongoing challenge
has been determining the scope of products to which the short-form regime should
apply, as exemplified by the debate over the reforms in the EU in relation to PRIIPS and
the exclusion of ‘hedge funds’ from the short-form disclosure regime in Australia. A
critical question is whether a comprehensive approach should be adopted, under which
the regime applies to all financial products (as defined in the relevant jurisdiction) or
whether it should be tailored to one product or certain products. At one end of the
spectrum are Australia, Canada, Hong Kong and Singapore, where the regime applies to a
limited range of products. Further towards the other end of the spectrum are the EU and
New Zealand, where the regime applies to a broader range of products.
In particular, the challenges have increased as jurisdictions have moved beyond simple
fund products, where the parties (ie, the trustee/manager or, in Australia, the ‘responsible
entity’) are highly regulated and the main risk is on the underlying investments, towards
structured investment products where there is credit and counterparty risk on the
product issuer as well.119 In this regard, a question has arisen as to how jurisdictions
should deal with complex products and whether they should be subject to an enhanced
regulatory regime (eg, the requirement for complex products to be sold only with
financial advice or the use of health warnings and complexity labels).
One of the reasons that this has been a challenge is that complexity does not necessarily
equate to higher risk. In addition, practical difficulties arise in determining what products
fall within the definition of ‘complex products’. Complexity has been recognized as a
challenge in relation to both length and disclosure generally. As noted in the IOSCO
Consultation Paper, ‘eight responding jurisdictions raised concerns about the complexity
118 The Committee of European Securities Regulators, CESR’s Advice to the European Commission on the Content and Form of
Key Information Document Disclosures for UCITS (Advice No CESR/08-087, The Committee of European Securities Regulators,
February 2008) 5 [3].
119 The latter has created complications in terms of the use of a single risk indicator, as the risk profile may differ depending on
the credit risk of the product issuer. See below Part III(B)(4)(e).
233
of retail structured products and the ability of retail investors to understand the
products’.120
The issue of complexity has been considered by a number of jurisdictions. Singapore
previously contemplated—but did not adopt—a proposal to include a definition of
‘complex investment products’, the sale of which would only be possible with financial
advice, and requiring Product Highlights Sheets to contain a ‘health warning’ to the effect
that the product could not be sold to an investor unless a financial adviser had explained
to the investor whether it was suitable, and that the investor should not purchase the
product if the investor did not fully understand the product. This has also been identified
as a challenge in New Zealand in relation to product disclosure statements generally.121
The EU considered a proposal to require complex products to carry a complexity label at
the top of the KID for products deemed to be complex and possibly not suitable for retail
investors. Under the new Regulation adopted by the European Parliament on 15 April
2014, the KID is required to contain a ‘comprehension alert’.
The importance of comparability: In all jurisdictions, the shift towards a maximum page
length, on either a mandatory or a recommended basis, has been accompanied by the
standardization of format to facilitate comparability, both within and across product
classes. Most jurisdictions have emphasized the importance of comparability. It is,
however, a double-edged sword in relation to comparisons across product types as there
is a ‘risk that investors may try to compare products with completely different product
characteristics (for instance, solely on the basis of their expected returns)’.122 In addition,
it has been suggested that there is a risk that all products may end up looking the same.123
Format and the use of graphics: Hong Kong, Singapore and Canada expressly encourage
the use of diagrams and graphics. Font size is expressly mentioned in all jurisdictions,
though this varies in degree of specificity.124 In addition, most jurisdictions adopt a Q&A
format for the presentation of information. While jurisdictions such as Australia
encourage product issuers to gauge PDS readability through testing with potential
consumers,125 others appear less flexible. For instance, Hong Kong mandates that
information in Product KFSs ‘shall be presented in a font that is easy to read and highly
legible’ and ‘shall be prepared in a format that facilitates comparison with other
products’.126 Additionally, while jurisdictions such as Singapore impose rigorous
120 IOSCO Consultation Paper (n 1) [23].
121 See Discussion Paper (n 97) [24]: ‘We acknowledge, however, that [prescribing a maximum length] may not be desirable for
more complex products, or products that rely on relatively sophisticated analysis to make well-informed decisions, such as initial
public offerings of equity securities (IPOs).’
122 IOSCO Consultation Paper (n 1) 48.
123 Jenny Chen and Susan Watson, ‘Investor Psychology Matters: Is a Prescribed Product Disclosure Statement a Supplement for
Healthy Investment Decisions?’ (2011) NZBLQ 412, 433, where the authors suggest that ‘presenting investors with simplified
documents could exacerbate the presence of behavioural biases in investment decisions’. See also Burn (n 117).
124 See, eg, The Council of European Securities Regulators, CESR’s Guide to Clean Language and Layout for the Key Investor
Information Document (20 December 2010) 8: ‘at least 11 pt for serif fonts and 10 pt for sans serif fonts’; PRIIPs Regulation art
6(3)(a): ‘characters of readable size’.
125 IS 155 (n 35) 5.
126 Handbook (n 61) [6.7(5)]–[6.7(6)] and notes (emphasis added).
234
‘tabular’ templates (including specifically-coloured strips ‘on the right edge of the
document’),127 others such as Canada allow for more flexible formatting options.128
While this comparative analysis of short-form product disclosure documents reveals
many similarities, the formatting and structure requirements of such documents remain
an area of relatively wide divergence. Such divergence is interesting, particularly given the
extent to which format is recognized as a critical element of readability.
The highlighting of risk and the use of warnings: All jurisdictions have requirements in
relation to the highlighting of risk and adopt various measures (or a combination of
measures) for this purpose. The measures include the requirement for features and risks
to be highlighted and specific requirements on the risks that must be included in the
short-form disclosure document.
There are also measures that apply to specific products. For example, Hong Kong
adopts a scenario analysis in relation to Structured Investment Products, which sets out
‘the best, middle-of-the-road and, at the very least, the worst-case scenarios’. In Australia,
ASIC requires the short-form document for margin lending facilities to be in ‘stark
language’, by which the emphasis is on disclosing risks and the consequences of risks in
terms that the lay investor can understand.129
Some jurisdictions have embraced synthetic risk indicators as a means of helping retail
investors assess risk and compare products. To date, these have tended to focus on the
risks inherent in the product rather than the risks inherent in the issuer and its business.
Others are sceptical about the merits of risk indicators and risk ratings (eg, Singapore). As
an example, the Fund Facts in Canada currently requires the fund manager of a mutual
fund to provide a risk rating for the mutual fund based on a risk classification
methodology chosen at the fund manager’s discretion.
With respect to the use of warnings, all jurisdictions require various types of warning
to be included in the short-form disclosure document. These requirements range from
general warnings to precise warnings to be affixed onto the short-form disclosure
document. The EU, for example, requires that the key investor information provide
‘appropriate guidance and warnings in relation to the risks associated with investments in
the relevant UCITS’.130 While this suggests that the warnings used will vary depending on
the underlying investment, it does not mandate the specific language to be used. On the
127 Securities Act (Singapore, cap 289, 2010 rev ed) ‘Guidelines on the Product Highlights Sheet’ (Guideline No SFA 13-G10,
Monetary Authority of Singapore, 21 October 2010) [3.2] (PHS Guidelines).
128 See, eg, Securities Act, National Instrument 81-101, Mutual Fund Prospectus Disclosure Form 81-101F3 Contents of Fund
Facts Document [7].
129 Australian Securities and Investments Commission, Non-Standard Margin Lending Facilities: Disclosure to Investors
(Regulatory Guide No 219, Australian Securities and Investments Commission, November 2010) 219.18(b). For the origin of the
concept of ‘stark language’, see Andrew Godwin, ‘The Lehman Minibonds Crisis in Hong Kong: Lessons for Plain Language Risk
Disclosure’ (2009) 32(2) UNSW L J 547.
130 UCITS IV Directive (n 4) art 78(3).
235
opposite end of the spectrum, Singapore provides an example of specific warnings
directly affixed onto the PHS templates.131
Additional information: All jurisdictions contemplate that additional information may be
included, albeit subject to various limitations. For example, Canada provides that the
Fund Facts should ‘include only the information necessary for a reasonable investor to
understand the fundamental and particular characteristics of the mutual fund’.132
4. Conclusions
There is an international trend towards the adoption of short-form disclosure
documents. Although this is a positive development in terms of producing shorter
disclosure documents that are easier for retail investors to understand and increasing the
likelihood that investors will make informed decisions, it is important to be aware of the
limitations of disclosure and the extent to which disclosure is a necessary but insufficient
measure, particularly in the context of complex financial products.
Other measures that are relevant in this regard are measures aimed at strengthening
investor education and the quality of financial advice. Although all of the jurisdictions
under examination have adopted such measures, further consideration should be given to
the interrelationship between short-form disclosure documents, investor education and
financial advice and the extent to which each should complement the other. For example,
further consideration should be given to guiding investors as to as how they should read
short-form disclosure documents.133 In addition, consideration should be given to the
importance of designing short-form disclosure documents so that they also serve the
purpose of facilitating the provision of advice by financial advisors. Investors who obtain
financial advice are more likely to make informed decisions if their advisors are wellinformed. In turn, their advisors are more likely to be well-informed if the short-form
disclosure document is designed in a way that helps advisors to explain the product to
their client.
This involves presenting the information in a manner that reflects the process by which
financial advice is given and includes the following techniques:
setting out the information in a Q&A format;
formulating the questions appropriately to ensure that they include the questions that investors are likely
to ask and are worded in an appropriate manner (eg they are neutral and do not confuse investors or
create the wrong impression);
listing the questions in a logical order; and
highlighting the risks in an appropriate manner and using language that identifies not just the risks but
also the consequences of risk in language that investors can understand.134
131 PHS Guidelines (n 126) app 1: ‘It is important to read the Prospectus before deciding whether to purchase the product. If you
do not have a copy, please contact us to ask for one.’ ‘You should not invest in the product if you do not understand it or are not
comfortable with the accompanying risks.’
132 Securities Act, National Instrument 81-101, Mutual Fund Prospectus Disclosure Form 81-101F3 Contents of Fund Facts
Document [4].
133 See, eg, The Investor Education Centre (HK), How to Read Product Key Facts Statements (2014).
134 This has been referred to in Australia as ‘stark language’. See Godwin (n 129).
236
In addition, consideration should be given to the use of risk awareness statements or risk
disclosure statements, particularly in relation to complex products. The thinking behind
this is that if risks are drawn specifically to the attention of investors, and if investors are
required to read and sign such a statement, they will think more carefully about the
product and be better able to determine the threshold question as to its suitability for
their purposes.135
Finally, a question arises as to whether harmonization between jurisdictions would be
appropriate, either in relation to the short-form documents that are used or the general
approach that is adopted. There is a threshold issue as to whether harmonization would
be possible, given differences in the legal and regulatory regimes, the scope of products to
which the short-form disclosure documents apply and the purpose that such documents
are designed to serve. These differences would appear to rule out formal harmonization
between jurisdictions, at least in the short term. However, it is likely that even limited or
qualified harmonization (eg, harmonization in relation to straightforward fund products)
would provide benefits for jurisdictions, particularly as mutual recognition and ‘fund
passport’ initiatives gain momentum and the cross-border distribution and sale of
financial products becomes more widespread. For this purpose, it would be useful to
achieve closer dialogue and cooperation between the regulators on the development and
the use of short-form disclosure documents.
Future research initiatives should include conducting market research regarding the
relationship between the length of disclosure documents and the likelihood that investors
will read and engage with them. Although the value of such research is likely to be limited
by the fact that all investors are different and it is impossible to construct a profile of a
‘typical investor’, the results should provide useful insights into whether the maximum
length of disclosure documents really makes a difference and, if so, the extent to which
the specific number of pages matters. It would also be useful to conduct research on the
interrelationship between the various measures referred to above (namely—disclosure,
financial advice and investor education) and whether achieving closer complementarities
between them would assist retail investors. In this regard, it is relevant to note the
increasing calls for smarter use of technology, such as consumer choice engines, to deliver
disclosure that is tailored to the needs of specific investors.136 Irrespective of the
directions in which jurisdictions head, there appears to be little doubt that issues
concerning short-form disclosure documents, including their scope and relative
importance, will continue to be debated.
135 For a discussion about risk awareness statements, see Godwin (n 129).
136 This is one of the options identified in submissions to the Financial System Inquiry in Australia: see (n 52). Other options
include the concept of layered disclosure, which distinguishes between mandated information that all investors should receive and
more detailed or deeper layers of information that would be available for the benefit of those investors who want it, and also the use
of complementary measures such as investor self-assessment tools. In addition, there have been calls to design a more flexible
regulatory toolkit that would confer greater intervention powers on the regulators, as has occurred in other jurisdictions such as the
UK.
237
Appendix
Jurisdiction
and name of
short-form
disclosure
document
Purpose of
short-form
disclosure
document
Content
requirements
Nature of liability
Hong Kong
Product Key
Facts
Statement
Summary that
exists alongside (ie it is
considered to
be part of) the
formal disclosure
document.
Summary that
exists on a
stand-alone
basis.
Information
to enable investors to
comprehend
the key features and risks
of the relevant
product.
Key features
and risks of
the investment
product to
investors.
Part of the formal
Clear, concise and
disclosure document effective.
and therefore subject to its liability
regime.
Singapore
Products
Highlights
Sheet
Australia
Shorter
Product
Disclosure
Statement
Substitute for
the
prospectus.
EU
Key Investor
Information
Summary that
exists on a
stand-alone
basis.
Product issuers are
only liable in certain
circumstances,
including where the
Product Highlight
Sheet contains any
information that is
false or misleading.
Prescribed
Subject to the liabilinformation— ity regime applicable
other
to disclosure docuinformation
ments. Material
may be incor- incorporated by refporated by
erence is deemed to
reference.
be part of the
shorter PDS and the
full range of liability
and enforcement
provisions of the law
apply to it.
The essential
A person does not
elements for
incur civil liability
solely on the basis of
making (informed invest- the key investor inment)
formation . . . unless
it is misleading, indecisions.
accurate or inconsistent with the
relevant parts of the
prospectus.
Disclosure standard—
form in which information should be
written or presented
Clear and simple
language.
Clear, concise and
effective.
Concise manner and in
non-technical language
(currently applicable to
UCITs).
Clearly expressed and
written in language . . . that is clear,
succinct and comprehensible (applicable to
PRIIPs under the new
regulation).
238
New Zealand
Key
Information
Summary
Canada
Fund Facts
Document
Summary that
is physically
part of the
long-form
Product
Disclosure
Statement.
The most significant aspects of the
offer of the financial products that are
relevant to a
prudent but
non-expert
person’s decision as to
whether or not
to acquire the
financial
products.
Summary that Key information important
exists alongto investors,
side (ie it is
considered to including perbe part of) the formance, risk
and cost—
formal disonly the
closure
information
document.
necessary for a
reasonable investor to
understand
the fundamental and
particular
characteristics
of the mutual
fund.
Part of the formal
Clear, concise and
disclosure document effective.
and therefore subject to its liability
regime.
The fund facts
Concise and in plain
document is incor- language.
porated by reference
into the simplified
prospectus.

Financial products and short-form disclosure documents

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