Who remembers the ‘Consumer Friendly Principles and Practices of Financial Management’, otherwise known as the ‘CFPPFM’? No?

Intended to improve the information people received about with-profits life policies, they were introduced in 2004. They were then discontinued in 2016 when it was established that virtually no one read them, and those who did, didn’t understand them. And this kind of problem is only going to get worse.

We now have the latest consultation on disclosure from a seemingly never-ending procession of well-meaning initiatives from regulators on the subject – CP26/24: Simplifying Consumer Investment Disclosure Requirements.

Your correspondent may sound a little jaded, but she was responding to FSA consultations in 2003 about this sort of thing. To give you an idea of how long ago that was, Prince William was still at Eton, Girls Aloud were top of the charts and Gordon Brown was pondering whether the UK ought to join the euro.

When it comes to illustrating the cumulative impact of costs, the way firms interpret the rules has become something of a quagmire.

And still the FCA is finding, in research published alongside the consultation, that only 6% of pre-sale disclosure documents tested were written in plain English, and not one was comprehensible to someone with GCSE-levels of literacy or below.

The problem with regulating disclosure, or as normal people would put it, ‘explaining to people what they’re buying’, is there are multiple different interests in play.

The client, who wants to know what will happen to their money. The adviser, who wants their job of explaining what different products will do made easier – or at least not made any harder. The compliance department of the provider, who doesn’t want the regulator turning up at their door demanding to know why a specific piece of information wasn’t given to the client and therefore wants every piece of possible information included.

To improve the situation the consultation aims to simplify information on costs and charges pre-sale, increase accountability post sale and confirm the rules on what’s fair relating to cash holdings.

Costs and charges

We are, whether we like it or not, in a phase of post-European regulation, and this leaves us with a hangover of rules and regulations which weren’t designed for the UK market.

Firms should continue to present the costs of the service to clients together with the costs of the products they’re buying before they commit to a transaction. The consultation suggests however that in future one-off costs, transaction costs and performance fees should be broken out separately, not folded into a single aggregated figure.

When it comes to illustrating the cumulative impact of costs, the way firms interpret the rules has become something of a quagmire.

Firms must give clients information showing the compounding impact over time and the gap between gross and net performance. This applies both pre-sale and in ongoing reporting. Many firms interpret this as requiring forward-looking illustrations. But since future outcomes can’t be predicted, any disclosure using future performance scenarios must be clear these aren’t expected returns.

Some firms interpret the post-sale requirement to give a personalised illustration of the cumulative effect of costs and charges on investment returns as a backward-looking illustration of actually incurred costs. Others present a further forward-looking estimate of future costs in their regular reporting. Firms use different presentations, including graphs, tables and narratives. The FCA therefore proposes to remove any requirement to present personalised forward-looking illustrations of the impact of costs over time in any disclosure.

Cash holdings

The FCA has made it clear in a Dear CEO letter to investment platforms and SIPP operators that firms better make sure their policy on retaining interest on clients’ cash balances represents fair value or they can expect to see the Consumer Duty big stick.

The consultation confirms that firms will not retain interest on retail clients’ cash while also charging fees on these holdings, and will only charge fees on cash holdings if they pass on interest in full. They must also explain in consumer-friendly terms how they set interest rates – for example, linking to the Bank of England base rate.

Too little, too late?

Generally, the consultation aims to simplify and clarify the information presented to customers. But is the FCA trying to keep pace with a world that’s evolving faster than its ability to respond?

Research suggests levels of literacy are getting worse, not better (this is US-based, but likely to apply elsewhere). How do you design disclosure literature in a world where “devoting extended, undivided attention to a text can now feel like too much to ask?”

If what’s on offer is already unintelligible to the average reader, how best to pass on information in future when people have abandoned text for short form video? There is at least an acknowledgement in the consultation that “most firms currently rely on a static PDF document that customers have to click through to” and that “firms should consider dynamic ways of presenting information in line with the [Consumer] Duty.”

So, will we see PDFs replaced by TikTok videos in future? Doubtful, but you never know.

At the same time as the FCA’s plans on disclosure, we have a government which wants to move people away from cash and make their investments ‘work harder’, significantly increasing the risk of people entering products they don’t fully understand. Particularly if that shift isn’t matched by equally strong efforts to build financial understanding first.

The regulator, the government and firms therefore need to ensure communication starts from people’s actual level of understanding, and builds from there towards the level of comprehension needed to invest safely. We’re a fair way from that now.