Submission on FMA Guidance Note: Effective Disclosure

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1 Submission on FMA Guidance Note: Effective Disclosure Company or entity Commission for Financial Literacy and Retirement Income (CFLRI) Organisation Type Autonomous Crown Entity Contact Person David Kneebone, Executive Director Phone (09) Other contact information Level 3 PO Box The Terrace Wellington 6144 Wellington 6011 Total Pages 8 (including Appendix) Date 9 March 2012 General points The Commission for Financial Literacy and Retirement Income supports the intent of the Financial Markets Authority to promote the disclosure of financial information which is truthful, clear, concise and effective. We believe another key criterion, which is implied in the Guidance Note but should be made explicit, is that registered prospectuses and investment statements are easily comparable. It is only when consumers have the opportunity to compare the features, benefits and risks of various products, that desirable levels of competition and investor confidence in the market will be achieved. This implies some standardised presentation of key information and we recommend a requirement for inclusion of a two-page, tabulated summary (but not a rigid template) at the front of each document. The consultation paper also omits consideration of a future mechanism for assuring financial documents adhere to the required quality standards. It appears that the FMA wishes to draw back from a quality assurance role and it may be that one or more entrepreneurial agencies will fill this gap (e.g. WriteMark or Consumer might provide documents with a rating). We recommend that the FMA make clear their expectations in respect of assuring document quality.

2 Specific points Consultation paper Submission Question 1 Question 2 Question 3 Ideally other regular communications to consumers would follow similar guidelines. These standards are appropriate but not sufficient. It should also be noted that a large proportion of the New Zealand population have low levels of general literacy (see Appendix). Both would be helpful, given that the concepts may be new to some. Question 4 We are unaware of any specific legal requirements. Question 5 Questions 6 & 7 Questions 8-10 We agree with the proposed guidance on brand information, photographs and other images. Allowing imagery of any sort in the key initial pages of a document blurs the potential for fair comparison. (NB a provider could use a celebrity prominently via other forms of communication and then only a distinct feature, such as reference to a hairstyle, or the frame of a pair of glasses in these key pages to remind the reader of the association. Refer to Appendix re. general literacy and numeracy. We agree wholeheartedly with the inclusion of the business model and the components identified, particularly the strategy and business plan. Presumably Dependencies would include key Recommendation At minimum providers should be encouraged to consider the guidance note for other communications (see Q. 45, 46). Include an additional criterion of comparability (see general points). Make maximum use of tables and graphical forms of presenting information. Prescribe techniques and provide examples. Require standardised, key information in the first two pages (see general points). Ideally, the guidance note would stipulate exact tables, colours, font sizes, etc, to allow consumers to make a very easy comparison between offers and also help those with various disabilities to access the information also. In table V either use key suppliers or sub-funds as an illustrative example of Dependencies or create a separate line for these. 2

3 Questions Questions Questions Questions Questions 23 & 24 Questions 25 & 26 Agree. suppliers, or sub-funds and this could be made clear. Agree, although the honesty clause needs clarification would the absence of such information imply dishonesty? Character (including honesty) is a more comprehensive concept, although both are very subjective. How will an investor know this statement is accurate? A general risk rating would be helpful to potential investors. Can standard definitions for low, medium and high risk be developed (as with credit ratings) to provide consumers with quick access to risk level? The volumes of information in Table VII may alienate or confuse some investors. We agree and the examples in Table VIII are relevant. Questions No further comment. Relevant information on regarding credit ratings might be useful for all providers to reference where ever a credit rating is used to aid consumer understanding of credit ratings (see the Sorted a-z guides, due for launch 12 th March 2012). The terminology used when referencing financial information should be expressed with the same clarity as other areas of the prospectus or investment statement. E.g. the term prospective may not be clear to some readers and could be more clearly explained ( likely future?). All terms should also be included in a comprehensive glossary in each document. Consider making the topic character rather than honesty and revise requirement wording as honesty or general character. Check terms used for appropriateness for a wide range of literacy and numeracy skills (see Appendix). Require inclusion of a comprehensive glossary in each disclosure document. 3

4 Questions 34 & 35 Question Questions No further comment. Questions Consistency between provider reporting on KiwiSaver investment performance and costs disclosure is important. We encourage exploration of costs particularly being reported to a consumer as a dollar figure per annum and as a percentage. For people to adequately compare whether their fund is relative to others the information should have a base comparability. Indicating that elements of some indirect costs aren t clear is acceptable, so long as the consumer can see that the (say) $450 they may be charged that year has this portion of unclear costs. Scenarios using average income and contribution levels for KiwiSaver may be necessary. The CFLRI welcome the opportunity to test options with consumers. We have made a similar offer to MED in previous submissions on disclosure. Including information like a ratio of equity to total assets may only be useful to many investors if there is accompanying information defining what the terminology means and what an ideal ratio result might look like. If this is presented in an appropriate context the provider could be encouraged to explain why their equity/total assets ratio differs from the ideal. This is true of any ratio displayed. Taken that many consumers probably make investment decisions based on advertisements, similar guidance should apply. Pp of the 2009 ANZ/Retirement Commission Financial Knowledge Survey sheds more light on Engage with CFLRI to do consumer testing of document readability. Include ratios in two-page summary (see general comment) with explanation of differences from industry norms. Apply similar guidance to advertisements. 4

5 Questions No further comment. where consumers seek financial information and advice. 35% indicate friends and family are their preferred source. We cannot reply on the quality of the information or advice given in such situations. Clause 22, page 10 Fourth bullet point required: o follow the above guidelines Clause 58, page 22 In what circumstances would it be misleading to include financial information? This risks undermining other guidance. Presumably commercial sensitivity (e.g. on pricing) could also be a reason for not including information. Give examples of misleading or leave this out. Consider commercial sensitivity (with specified examples). 5

6 Appendix: Literacy and Numeracy in New Zealand The information provided in the appendix is based on the two Adult Literacy and Life Skills (ALL) surveys. The ALL survey is designed to answer the following questions: How is literacy skill distributed across the New Zealand adult population? Has there been any change in this distribution over the past 10 years? Do the further education and training activities of New Zealand adults vary according to their literacy skills? How do the skills of adults in New Zealand compare with those of others? The Adult Literacy and Life Skills (ALL) survey is an investigation of the distribution of certain skills among people aged 16 to 65. The skills tested are literacy, numeracy and problem-solving. The survey is conducted across a number of countries, which allows for cross-country comparison as well as providing information specific to New Zealand. The ALL survey follows a similar survey conducted in 1996: the International Adult Literacy Survey (IALS). Parts of the ALL survey are directly comparable to this earlier work, and the comparison provides a picture of some of the changes that have occurred, both internationally and nationally, over the previous decade. New Zealand has a significant proportion of adults who are unable to participate effectively or fully in a knowledge society because of low language, literacy and/or numeracy skills. The 1996 IALS 1 revealed that in New Zealand, as in many other countries, almost half of all adults aged from 16 to 65 years old had pressing literacy and numeracy needs. One in five New Zealanders were found to have very poor literacy skills. The majority of Māori and Pacific adults performed well below average on all aspects of literacy and almost half of all unemployed people were at the lowest level of literacy. The more recent 2006 IALS 2 compared results internationally for numeracy (the ability to understand and process mathematical and numerical information) and document literacy (the ability to read and understand discontinuous texts such as graphs, charts and tables). This survey shows that approximately 50 percent of the adult New Zealand population still have low numeracy and (document) literacy scores. Of particular concern once again is the over-representation of Māori and Pacific populations at the lowest levels of numeracy performance (results are not yet available for document literacy). Literacy (which here includes listening, speaking, reading and writing) and numeracy skills are often integral to the work and activities adults need to do. Developing these skills enables people to participate more effectively in our society. 1 Refer to Walker, Udy and Pole (1996): Adult Literacy in New Zealand; Results from the International Adult Literacy Survey (see 2 The Adult Literacy and Life Skills (ALL) Survey: Headline Results and Background, Ministry of Education, December 2007 (see 6

7 ALL prose literacy skills levels Level one Level two Level description Very low skills - tasks at this level require the ability to read simple documents, accomplish literal information-matching with no distractions, and perform simple one-step calculations. (Ability to understand or perform tasks related to percentage function does not fall under this category). Low skills - this level includes tasks that demand the capacity to search a document and filter out some simple distracting information, achieve lowlevel inferences, and execute one- or two-step calculations and estimations. NZ population aged years 13% (380,000) 31% (890,000) Level three Levels four & five Essential skills - typical tasks at level three involve more complex information-filtering, sometimes requiring inferences and the facility to manipulate mathematical symbols, perhaps in several stages. (This level is seen as a minimum level for an adult to be able to function as an independent person in their day to day life.) High Skills - a level four task might demand the integration of information from a long passage, the use of more complex inferences and the completion of multiple-step calculations requiring some reasoning. Level 5 tasks incorporate the capability to make high-level inferences or syntheses, use specialised knowledge, filter out multiple distractors, and to understand and use abstract mathematical ideas with justification. 41% (1.2 million) 15% (430,000) 7

8 Numeracy skills in the table below shows a higher number of people with very low to low numeracy skills than literacy skills. ALL numeracy skills levels Level one Level two Level three Levels four & five Level description Very low skills - ability to make one-step calculations but likely to experience considerable difficulties. Low skills - ability to make one or twostep calculations and estimations. Problems with new or changing demands. Essential skills - minimum level of numeracy needed to fully meet all the numeracy demands of modern work and life. High Skills - ability to complete multi-step calculations and reasoning including abstract mathematical ideas. % NZ population aged years 20% (570,000) 31% (890,000) 32% (940,000) 17% (480,000) Sources: Adult Literacy and Life Skills (ALL) Survey: Overview and International Comparisons. Ministry of Education, March 2008 (see Population estimate calculated from NZ Stats Population Estimate file 10, June 2010 (cited in Workbase documents on their website: Based on the ALL results, as at 2006, approximately 12 percent of employed people had document literacy skills at level one, and 40 percent were at level one or level two. Similar proportions of workers were at level one or at level one or two on the prose literacy skill domain. Sixteen percent of workers had numeracy skills at level one, and 46 percent had numeracy skills at level one or two. Sutton (2009) examined the demographic and educational characteristics of adults with level one document literacy skills, level one numeracy skills or both, using ALL data. She found that: immigrants (i.e. people born outside New Zealand) made up 38 percent of those with both literacy and numeracy skills at level one; recent immigrants (those who had arrived since 2000) made up 14 percent of those with both literacy and numeracy skills at level one; 38 percent of adults with both low literacy and numeracy skills spoke a language other than English as their first language; members of the Māori, Pacific peoples and Asian ethnic groups were overrepresented among adults with low literacy and numeracy skills; the educational qualifications of this population were relatively low: 32 percent had completed less than three years of secondary education; at the time of their interview, approximately 60 percent were employed about 10 percent were unemployed and about 7 percent were students. 8

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10 OECD and Statistics Canada (2000) provide the following characterisation of level three: Level three is considered a suitable minimum for coping with the demands of everyday life and work in a complex, advanced society. It denotes roughly the skill level required for successful secondary school completion and college entry. For full reports on the New Zealand results from ALL survey see: Or see links below for specific reports: data/assets/pdf_file/0005/6665/sampletasks- IALS.pdf The OECD website has a number of IALS, ALL, and adult literacy related publications. Other reports can be found on the Adult Foundation Learning index page. 10