FSA KFD seminar
Andrew Sykes, Head of Dept, Investment Policy and Unfair Contract Terms,
FSA
Key Features Documents Seminar
6 May 2008
Good morning everyone and can I thank you all for giving up your time join us today for this important but all too frequently overlooked topic.
To misquote Mark Twain, "I apologize that this speech is so long. I did not have the time to make it short." Hopefully, through judicious pruning and focusing on the key points I have avoided this pitfall. But I think that quote sums up one of the main problems we have found with Key Features Documents. It also hints at part of the solution. We're here today because too many KFDs have, amongst other things, become too long and opaque. This means that they fail in their main aim: to clearly and concisely explain the key information a consumer needs to know before buying a product.
However, the good news is that our recent work with firms shows that many of you are already seizing this opportunity and making significant improvements to KFDs. I hope that after thinking about and discussing KFDs today you will be better placed to improve your own.
It's worth reminding ourselves why KFDs are so important. It’s easy for consumers to feel daunted by the range of products on offer, the choices they contain and their apparent complexity. They may also feel overwhelmed by the range of documents given to them at the point of sale. We have taken steps to reduce the amount of information required - for example by no longer requiring a Menu and an IDD - but consumers are still faced with a mass of material. It is therefore critical that there is a document with some cut-through; which tells consumers the essential information about the product they are considering buying.
In a way, our view of KFDs is similar to those film ads that sonorously declare 'if you see only one film this summer - make it this one'. If consumers read only one document about their potential investment we want it to be this one. And that means it has to work.
It is not only us that think this. I’m delighted that the ABI also recognises and supports the need for improved KFDs. The ABI's Customer Impact Scheme, and in particular its guide to clear language and layout, are very useful pieces of work which I commend to everyone here. I am very pleased that Maggie Craig has taken the time to join us today and for the ABI's support in achieving better disclosure documents.
I am also very encouraged by the quality of some KFDs and the action we know some firms are taking as a result of our report on good and poor practice in KFDs published last September. Your attendance today shows that you recognise the benefits of having products and literature that consumers can easily understand.
It might be helpful if I briefly sketch out the context of our drive to improve KFDs. As some of you may know, the KFD was introduced in 1994. The objective at that time was "to introduce a system in which private customers receive clearer, more comprehensible information about the products they are buying." The specific aims were to:
- give consumers the information they need about a product and its charges so that they can make informed decisions about whether to buy it; and
- ensure that the information is presented in a format and at a time that helps consumers and advisors make comparisons between products and providers.
So, the aims of this document have been clear for a long time and those objectives remain the same today. However too many firms have lost their focus and fallen into the habit of producing KFDs in a legalistic and overly-long bureaucratic style. There has been all too often:
- a failure of the KFD to ‘stand out’ and identify itself as being important; and
- a perception that it is boring and impenetrable.
This creates uncertainty about the role of the KFD in practice: is it to help consumers or protect providers?
As a result we have researched and consulted extensively to find ways to improve the effectiveness of disclosure documents. This led us to propose the 'keyfacts' branded 'Quick Guide' as a potential replacement for the KFD. The Quick Guide was a two side document that answered ten key questions and signposted to other documents.
But, while we were able to identify a clear consumer preference for shorter, more-focused material, we found that good examples of KFDs were equally as effective as the Quick Guide. To put it another way; we found that simply changing our rules wouldn’t necessarily produce more effective disclosure documents. So, we announced in 2006 that we would keep the KFD and brand it as a ‘keyfacts’ document. We decided to back this up by ensuring that providers were clear about the standard of KFDs we expect.
The quid pro quo for not imposing costly changes is for the industry to up its game. Keeping the KFD format, but expecting firms to raise the standards of the documents, ties in perfectly with our more flexible COBS rules and our move to more principle-based regulation. This gives firms the opportunity to present and write KFDs that are tailored to their specific products and their target audience.
It’s worth noting that while we were reviewing KFDs the National Consumer Council and BRE published a report called “Warning: too much information can harm”. This highlighted, among other things, the dangers of information overload. We were not surprised. Our extensive research very much supports a “less is more” approach.
I expect that some firms, if undecided about what information to include in their KFDs, will err on the side of caution and include it. This carries its own risks though. The longer a KFD is, and the more extraneous some of that information appears, then the more likely it is that readers will switch off. You need to be clear that too much information can produce as bad an outcome – the KFD not being read – as too little.
Disclosure material is an important part of firms' Treating Customers Fairly obligations. Firms are clearly unlikely to fulfil TCF outcome 3 - providing consumers with clear information and keeping them informed throughout the sales process - if their KFDs are poor. I would go further though and say that firms that produce good quality KFDs tend to understand that TCF is about ensuring that all aspects of the customer journey – not just the ones customers notice - are fair. So, we have linked our deadlines on KFDs with the TCF deadlines.
Our KFD work goes hand in hand with our efforts to develop the 'keyfacts' logo. We have expended considerable effort in encouraging consumers to recognise that the logo signifies critical product information. The more consumers recognise and understand the Keyfacts logo, the more important it is for KFDs to be effective. Again, there is little point in developing a brand that encourages consumers to read documents that do not turn out to be helpful.
So that’s the background. Now if I can go back to our findings from the sample of KFDs we looked at last year.
We found that 35% of the KFDs were poor or ineffective, only 15% were effective, and the rest - while meeting the handbook’s detailed rules for content - were quite simply [badly written and presented] not clear enough. Many firms, quite simply, must do much better. To give just one example, an ISA “risk factor”:
Some Open Ended Investment Company Funds (OEICs) are part of an umbrella structure. As a result, although each fund will be treated as being responsible for meeting its own liabilities, the Authorised Corporate Director of the Fund may reallocate these in a manner which is fair to all the OEIC investors if any other Funds are unable to meet their liabilities. A shareholder will not, however, be liable for the debts of the OEIC after paying the purchase price of the shares"
Now, you or I might be able to understand this after reading it a few times but what chance does the ordinary ISA investor have? Also, does this give the investor a sense of the likelihood of this event happening, or the impact it might have on their specific investment?
Description of risk is just one area of where we expect clearer thinking. Overall, we expect firms to produce KFDs that:
- are focussed on the decision to buy (or not to buy);
- stand out in sales packs;
- use concise plain language supported by good presentation; and
- are clearly developed with the capability and needs of the consumer in mind.
I ought to add that we expect firms to be able to achieve this by themselves. It is not normally a regulators job to give lessons on presentation and plain English. I believe all it really requires is for you put the same effort and expertise into the KFD as you do into your marketing materials. Interestingly, we have spoken to some firms who have simultaneously produced both poor and good quality KFDs for different products. So, sometimes all it will take is for good practice within a firm or group to be shared.
What we are saying is not new or rocket science. Indeed, many firms follow principles of clarity and accessibility in their marketing materials. There's plenty of guidance on plain language and consumer understanding available – not least the ABI's customer impact guide – and we expect firms to use it as necessary.
So how have we followed up our report? Our Supervisors and Consumer Information Team have been speaking with those firms that produced KFDs we assessed as poor or ineffective. In the main firms have reacted very positively with many already putting improvements in place. We can often hear the penny dropping and many have admitted that a review of their KFDs was overdue.
Some firms have said that the Simplified Prospectus rules prevent them from including key information in a clear and concise manner. We do not accept this. There is nothing in the Simplified Prospectus requirements that prevents firms from making sure that their disclosure documents are well written, accessible and helpful to their target consumer.
Looking forward, it is likely that the Commission will replace the Simplified Prospectus. Although the Commission has not produced its final proposals we can be confident that it will aim for firms to produce clear and understandable consumer guides to a product. So, your work on improving your disclosure material will not be wasted.
We will continue to engage with firms directly about their KFDs. We have linked the KFD improvement deadlines with those on TCF, so firms can expect more scrutiny from supervisors. If we have concerns we will raise them with the firm and will expect the firm to take action swiftly. This November we will revisit some of the KFDs in our original sample and, if necessary, will have tough conversations. Given your attendance here I don't expect that to happen with any of you!
I hope that you find the presentations valuable and that you make the most of discussing these issues with each other. We recognise that some of you may face challenges in improving your KFDs, but I'm sure that by talking through the issues you can start identifying the solutions.
My advice would be for you to constantly put yourselves in the shoes of the average consumer. Ask yourself whether a member of your family would understand your KFD. Perhaps you can even take some KFDs home with you!
Again, thank you for your time, and I hope that you make the most out of this morning.