Europe’s financial regulators are calling for improvements in product disclosure for retail investments.
In a joint statement, the region’s major regulatory authorities — including securities, banking, insurance and pension regulators — recommended improvements to the basic disclosure documents that are provided with retail investment products.
The European Supervisory Authorities — the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA) — said they “identified a range of poor practices” in how industry firms are providing disclosure to investors.
Among other things, the regulators said firms are providing investors with insufficient information about potential losses and capital protection levels; imprecise descriptions of early termination features; inadequate disclosure of leverage risks; and a lack of specific information about products’ underlying assets.
“Most issues relate to a general lack of clarity in the text, which makes it difficult for retail investors to understand the key features of products,” the regulators said, noting that the use of automation in creating the text contributes to the issues.
Automated disclosures “often contain a generic description of how the product works in very technical and legal language,” which results in disclosures that are “very difficult” to read and understand, the joint statement noted.
Yet, the regulators said firms manage to produce marketing disclosure for the same products that use bespoke text and produces “a much higher level of quality” than the automated disclosures to meet regulatory requirements.
As a result, the regulators said that any automation “should not impair the use of clear, succinct and comprehensible language” in the required investor disclosures, adding that, “quality checks are advised to ensure the clarity and accuracy of the drafting.”
The regulators’ joint statement sets out expectations for improvements in these disclosures, with the aim of enhancing retail investor protection.