Start thinking about product regulation: Mayhew

New Zealand’s investment market remains a disclosure based regime but it might want to start thinking about product regulation says the Commissioner for Financial Advisers David Mayhew.

Friday, September 17th 2010, 6:53AM 2 Comments

by Jenha White

He says the current theory is that regulating disclosure of information will deal with the asymmetry of knowledge for a purchaser of financial products.

However, he says there is concern that disclosure leads to information overload with 100 page documents.

"No matter how much effort is put into investor literacy, we all glaze over the details of financial products.

"Should we be thinking about product regulation, relying on brand reputation of the manufacturers and distributors of products?"

Mayhew asks why financial products should be treated differently to other complex products and practices.

He quoted John Kay, a Professor of the London school of economics who said:

"Many people who deplore public ignorance in financial service matters, would hesitate to lift the bonnet of their car or distinguish their larynx from their thoryx.

"The consumer is confident in purchasing products such as automobiles or medical services of which he or she knows little, as a result of the efforts of producers in developing good reputations with their customers. Also because users are able to access the skills of trusted intermediaries.

"Product regulation and reliable intermediation are the mechanisms through which markets handle information asymmetry," says Kay.

He believes if there is a problem in financial services it is that producers have had little regard to their long run reputation and because intermediaries have not deserved the trust of consumers.

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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Comments from our readers

On 20 September 2010 at 11:18 am Simon Hassan said:

I couldn't agree more. It is well and truly time for all investment products offered to the public produced standardised short-form 'information sheet' style summaries to help investors and financial advisers understand them and make 'apples and apples' comparisons based on such things as asset allocation and other features, taxation, risks, past returns, benchmarks, commissions and costs.

On 20 September 2010 at 11:59 am Andy Phillipson said:

A disclosure or investment statement that was more palatable would solve a lot of problems. It should also include a clear and pointed sentence on the front cover pertaining to Risk versus Return, and a brief statement inside educating potential investors. This statement must be clear in the practice of protecting the capital, UNLESS the investor is prepared to risk losing it with high return portfolios. One of the best investment statements I have seen also included the top 20 companies that the fund manager invested in for each fund. That way I had an idea of the risk involved, and had the choice of whether or not to support that business. Other companies also provide regular “Fund Fact Sheets” that give a very clear picture of short and long term returns for all funds. When you look at these sheets over a long period of time your investment choices are obvious. Simplicity and clarity will always win over detail. 2-3 pages should be more than sufficient.