The U.K.’s Financial Conduct Authority (FCA) is embarking on an overhaul of its product disclosure rules, promising a regime that’s simpler and more flexible than the existing requirements.
The FCA launched a consultation on its plans to simplify the disclosure that investors get from certain retail investment products, including open- and closed-end funds, structured products, contracts for difference (CFDs), insurance-based investments, and derivatives.
According to the regulator, the existing rules in the area are drawn from European requirements that prevailed when the U.K. was part of the European Union — rules that it now says are overly prescriptive, resulting in mandated disclosures that are often complex and not helpful to investors.
The current disclosure requirements “do not effectively help decision-making as they do not consistently engage consumers,” the FCA said in its consultation paper. “This is partly due to the document’s prescriptive format, which we believe fails to capture attention at critical decision points.”
These rigid disclosure requirements can also result in “inappropriate information” being provided to investors, it said, “due to the prescriptive methodologies not working well across all situations.”
Now the FCA is developing its own set of disclosure rules that aims to address these failings.
“We are consulting on a new product information regime to help consumers understand the products they are buying while giving firms flexibility to innovate. It simplifies existing requirements and enables better digital communications. It also sets out detailed requirements as necessary to ensure consistency and comparability across the market,” the regulator said.
Among other things, the new regime would do away with format requirements, giving firms freedom to design their disclosures. Firms would also have more flexibility to describe product costs and their impact on returns.
Risk disclosure would shift from required credit and market risk disclosures to metrics based on the specific product’s volatility, and firms would have the flexibility to change risk indicators based on key product features, such as a capital guarantee, and to combined risk-reward information.
For performance disclosure, the FCA would replace narrative requirements with visual disclosure — a past performance graph covering a 10-year period (where available).
“By setting proportionate requirements that encourage firms to innovate in the way they communicate product information, we want more consumers to engage with retail investments, improving the competitiveness of UK capital markets and promoting growth,” the paper said.
The new regime would apply to any firm that manufactures or distributes investments to retail investors in the U.K., including foreign firms. The FCA said that’s intended to ensure a level playing field, improve industry competition, and enhance investor choice.
“The way people invest has changed. We want to ensure that firms can communicate with their customers in a way that gets them the information they need when they need it,” said Simon Walls, interim executive director of markets at the FCA, in a release.
“High quality product information will give consumers the confidence to invest; increased participation in this market will not only benefit consumers but will also provide capital to drive the economy and boost growth,” he added.
The consultation will run until March 20, 2025.
The FCA said that it intends to finalize its new rules in 2025.