Detailed disclosure may be of benefit to some, but getting all consumers to read complicated financial documents, like insurance policies, and take note is another matter entirely.
By: Tony Kaye
“Read the fine print” is an idiom most consumers would be very familiar with, especially in the context of buying insurance, taking out a loan, or investing funds into a financial product. The purpose of doing so, of course, is to be fully aware of all the terms and conditions, inclusions and exclusions, as well as the rights and responsibilities of both the product issuer and the customer.
Yet, it should come as no great surprise that most consumers don’t bother reading often complex and lengthy documentation such as product disclosure statements (PDS), prospectuses and even simplified materials such as key fact sheets.
That can have disastrous consequences, as many Australians have learned the hard way after finding their insurance policies haven’t covered them for natural disasters like floods, bushfires and storm surges. Reading their policy documentation thoroughly to see the specific risk exclusions may have led some to take out additional cover to protect their homes and contents.
For legislators, regulators and industry bodies alike, another common phrase aptly fits this concerning and frustrating issue: “You can lead a horse to water, but you can’t make it drink.”
The problem with consumers and fine print
In a bid to tackle the issue, the Insurance Council of Australia (ICA) established an independent effective disclosure taskforce in 2015 to examine both consumer behaviours and product disclosures. Its research to date has found that the industry needs to be nimble and innovative in engaging with a diverse range of consumers.
“The research also suggests that the industry needs to do more to ensure that consumers are not just focused on the price of a policy but are cognisant of the importance of selecting the right type and level of cover,” the ICA says.
That concurs with a 2018 study by two Monash University professors, who found that even when consumers do read all relevant documentation, a high percentage still don’t choose the best product.
Titled (In)effective Disclosure: An experimental study of consumers purchasing home contents insurance, Justin Malbon of the Faculty of Law and Harmen Oppewal from Monash Business School asked 406 participants from across Australia to purchase a home contents insurance policy from a choice of three different products. Each was provided with a PDS or key fact sheet.
“The industry would be concerned about a mandated imposition that risks oversimplifying products, reducing competition and undermining consumer choice. Price is only one consideration when buying insurance.” Campbell Fuller, ICA
Despite having all relevant information at their fingertips, 42 per cent of participants chose the worst offer, and only 46 per cent found and selected the best policy. A large number based their decision on price and brand.
Further, the results did not find a clear pattern of understanding where people were provided with greater or lesser disclosure information.
“In these circumstances, the question needs to be asked whether disclosure is an effective tool at all to aid consumers in choosing an insurance policy,” Oppewal says.
He adds that while mandated disclosure may serve other purposes, including informing the purchase choices of highly literate and motivated consumers, the study findings indicate that even in ideal circumstances disclosure does not ensure consumers make better decisions.
Reducing complexity in fine print
The move towards providing consumers with more detailed product disclosure information has been evolving over many years. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has recommended more disclosure in a range of areas such as fees and remuneration.
The Australian Securities and Investment Commission (ASIC) is also strengthening its enforcement powers to ensure all retail financial products fully comply with the Corporations Act and has warned it will ban products and prosecute issuers and distributors when necessary.
Catherine Maxwell, executive manager, advocacy at the Governance Institute of Australia, says a lot of the problems come back to regulatory complexity, and until this is addressed the issues around providing the right level of disclosure to retail investors will remain challenging.
Getting back to plain English
Maxwell says ASIC’s product exemption powers will be a “game changer” in terms of intervention in helping to protect consumers, but adds that modernisation and simplification of the current laws is also important.
“I don’t think there’s a silver bullet,” she says. “I think it really requires a multi-layered approach. You need to address the issue of regulatory complexity. I think also, companies and preparers have to approach documentation from a plain English readability point of view.”
As well as improving financial literary, Maxwell says regulators, lawyers and accounting bodies have an important role to play in devising financial documents that consumers will read.
Oppewal says creating a simplified system for insurance products and disclosure practices is one solution.
“We should consider requiring insurers to offer a standard set of gold, silver and bronze cover across the industry. That way the market can compete on price and not confound consumers about what is covered and not covered when they make claims under their policy.”
That’s not so easy, the ICA insists.
Spokesman Campbell Fuller says the ICA will review the Monash report findings and discuss them with its members, adding “there are complex issues of product choice and competition”.
“The industry would be concerned about any mandated imposition that risks oversimplifying products, reducing competition and undermining consumer choice,” Fuller says.
“Price is only one consideration when buying insurance. Consumers should be encouraged to buy the product that best suits their needs, and the cheapest product will not necessarily meet that criterion.”
It seems, however, that when consumers are given information other than price, they don’t necessarily use it to make the best decision.
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