Simpli fi cation, Not Yet
The European legislator has devoted considerable attention to information disclo- sures relating tofinancial services. Due to the often complex, sophisticated, highly- technical nature of those services and the inherent difficulty for consumers to fully understandfinancial products, the provision of information to consumers in thisfield is a key component of consumer protection. It thus comes as no surprise that particularly with regard to credit, investment services and insurance services the European legislator developed key information documents that streamline a reduced quantity of information to consumers with the aim of making that information more accessible for consumers.301 Also in the field of payment accounts there exist
298Cf.Pfeifferin Wolf/Lindacher/Pfeiffer AGB-Recht, 6th. ed. 2013, introduction mn. 23.
299See the contribution of Schinkels to this book.
300Report of the Fitness Check of EU Consumer and Marketing Law (2017), p. 84.
301See for instance the SECCI (Standard European Consumer Credit Information—Consumer Credit Directive 2008/48/EC,O.J.2008, L 133/86), the ESIS (European Standardised Information Sheet—Mortgage Credit Directive 2014/17/EU,O.J.2014, L 60/34) and the KID (Key Information Document—Regulation 1286/2014 on PRIIPs,O.J.2014, L 352/1). This evolution is generally welcomed for it also prevents that mandatory information is mixed with commercial information for marketing purposes. But despite the advantages the lists of information particulars that have to be disclosed to consumers remains long. Furthermore it remains unclear whether consumers are effectively able to absorb and understand the prescribed information. Compare with a national survey in South-Africa executed by Ramchander (2016), pp. 67–73. Thefindings of the survey were that consumers have a low to very low level of understanding of the features of basic insurance products (see p. 73). For a recent study on risk disclosure in corporate annual reports (capital markets) in a number of EU Member States, see Cordazzo et al. (2017), pp. 682–714. Disclosure effectiveness remains understudied. For a research with focus on identifying how the dimensions of a disclosure influence its efficacy, examining how different methodologies should best be deployed for disclosure testing and studying the market effects of mandatory disclosures, see Johnson and Leary (2017), pp. 184–191. See also Perry and Blumenthal (2012), pp. 305–312, who point out that
standardised formats like the fee information document and the statement of fees that must be not misleading and provided to consumers in clear, unambiguous and non-technical language, using characters of a readable size.302 This illustrates a real tendency towards a rationalisation of information given to consumers.303How- ever, as the provided information remains technical, the shift towards simplification of information disclosed to consumers has not yet gained much ground.304
the literature to date lacks conclusive evidence of the effects of disclosures on decisions and outcomes, such as loan choice or performance, and also that research examining the role of disclosures in light of other social, contextual, or informational influences is scarce. They conclude that a much more thorough analysis of the effects of disclosures on decision quality must be undertaken.
302See more extensively, De Muynck (2010), pp. 1222–1230, who points to the omission to enlighten, on a clear and concise way a vast category of borrowers (those who are not capable of being careful readers) about some of the most essential characteristics of the pursued credit (at p. 1223). See also on this subject the contribution of Kelly to this book.
303A recent study executed by Edwards favours even an extension of the prospectus obligation to professionals in professional services markets. The prospectus has already proven effective in the securities markets. See Edwards (2017), pp. 1457–1515. According to Edwards a professional prospectus would reduce information asymmetries and improve the market for professional services through disclosure and consumer choice. It would also make professional reputation a more potent force.“Self-regulating professions and occupational licensing bodies often fail to protect consumers because they tend to act like cartels - behaving more in the interests of their members than of the public”(p. 1462 and 1489–1492). Further,“consumers often struggle to recognize low-quality professional services because professionals sell credence goods”(p. 1485). A Professional Pro- spectus would then complement the existing occupational licensing systems.“Tailored disclosures delivered through a Professional Prospectus would put existing public information into consumer hands, allowing the market to more efficiently price professional services. This would discipline and deter professional misconduct and reward higher-quality service providers”(p. 1515), see Edwards (2017), pp. 1457–1515, who further indicates that“the most benefits seem likely to emerge from presenting the information in a short, standardized, and clear format”(p. 1496). Also Baisch argues that despite the information overload the provision of information must not be condemned; this would mean throwing the baby out with the bath water. Disclosure can be used and function’s also as a nudge; thus the way information is framed matters a lot. See Baisch (2016), pp. 217–243, who also argues that education could, at least partially, compensate negative outcomes of humanflaws (at p. 242).
304See specifically on this subject, the contributions of Piazzon and Baysal to this book. Addressing the new EU mortgage credit directive 2014/17/EU, cited above, also De Muynck and Bruloot indicate that the information credit intermediaries are required to provide consumers, for instance on remuneration, are unsatisfactory, because they assume“that consumers will (1) be both able and prepared (. . .) to disentangle the knot between different financial incentives and intermediary behaviour and (2) to act upon the disclosed information”, see De Muynck and Bruloot (2017), p. 35. Thus, the real impact of such information will be doubtful, ineffective and does not constitute a sufficient protection of consumers. As a result the authors believe that they should be complemented with targeted remuneration regulation specifically addressing the most hazardous remuneration practices. Compare with Jonker et al. (2017), pp. 136–138, who point out with regard to consumer credit that“a large percentage of consumers do not understand what the information provided”(136) and conclude that“the increasing complexity hollowed out the mandatory infor- mation duties to the point of becoming useless, resulting in an information paradox: consumers can only be considered responsible if they could be brought to stomach a mass of indigestible information”(p. 138). Also V. Colaert recently came to similar conclusions, see Colaert (2017),
In the aftermath of the financial crisis the European legislator required the financial institutions to conduct a suitability assessment to ensure that thefinancial product in question is suitable for the concerned consumer. It follows that a credit institution may not offer a credit to a (vulnerable) consumer unless the consumer has the capability to pay off the debt. Appropriate provision of information is thus complemented with careful product design and suitability assessments of consumers.
In a number of the reported countries consumers are further protected by codes of practice with more specific information requirements.305
In Finland providers of intangible expert services, such asfinancial services, have an increased information duty and are required not only to provide correct and sufficient information but also comprehensible information, in accordance with the so-called‘pedagogical duty’of an expert service provider.306
p. 10. She furthermore points out that“even improved information obligations indeed cannot deal with certain biases, such as for instance overconfidence or herd behaviour”and that“if the PRIIPs regulation wants to achieve its goals of easily accessible information and comparability of substitute products, its scope of application is still too limited”(11). She concludes:“Legislators in the EU have come to understand that for investors to absorb and compare information, there should not be too much of it (information overload), it should be well-structured in conformity with a standardized format, and it should be attractive and accompanied by visual aids where possible. A clear trend with respect to information as a tool of investor protection is indeed a focus on presentation and a tendency towards short, standardized key information documents. At the same time the legislator has understood that the“caveat emptor”principle, underpinned and reinforced by the information paradigm, has reached its limits in thefinancial services sector. Behavioural biases andflawed investor decisions cannot or only partially be solved by simpler, shorter and more standardized information. Information requirements are therefore increasingly complemented with two other building blocks of investor protection: service quality rules (conduct of business) and product regulation.”(p. 28). In the same vein D. Busch concludes: “Under MiFID II, the amount of information that must be provided to investors is set to increase rather than decrease and the information will also have to be more detailed. This is despite the fact that many people doubt whether the huge volume of information provided really helps investors to make informed and well- considered decisions”, in Busch (2017), p. 380. On a broader account Sah and Loewenstein (2014), pp. 575–584, argued that mandatory and voluntary disclosure can deter advisors from accepting conflicts of interest so that they have nothing to disclose except the absence of conflicts.
305In Ireland for instance the Consumer Protection Code 2012 requires“that all information of regulated entities provided to a consumer is clear, accurate, up to date, and written in plain English.
Key information must be brought to the attention of the consumer. The method of presentation must not disguise, diminish or obscure important information”. Furthermore, the information must be given in a timely manner, having regard for inter alia the time necessary for the consumer to absorb and react to the information provided. Also in Poland a code of conduct for consumer credit advertisements has been drafted by the key stakeholders in 2016. Find more information in the contribution of respectively Kelly and Namyslowska and Jablonowska in this book.
306See the contribution of Hyvửnen to this book. This results for instance in the obligation as regards insurance contracts to bring the major exclusions of coverage to the attention of the consumer or in investment services to take into consideration the previous investment experience of the consumer, his age or his possible medical condition which might lead to a lowered level of comprehension of significant features of the investment-type insurance policy. With regard to investment services the Financial Supervisory Authority developed guidelines which, although non-binding as such, function as good practices. Deviating from good practices could constitute a breach of the Market Securities Act in Finland. See e.g. the Supreme Court judgment in KKO
Also Japanese law imposes an obligation on the professional to advise consumers on the risks of certain investment transactions.307 As a result, a financial service provider in Japan is not allowed to contract with a consumer if the financial transaction is not appropriate having regard to the knowledge, the experience and the financial capacity of the consumer.308However, it must be stressed that this protective legislation is limited to consumers who are layman in thefinancial sector and thus effectively lack specific knowledge in that domain.
A similar suitability rule is included in the Taiwanese Financial Consumer Protection Act. According to this rulefinancial service suppliers, before signing a contract relating tofinancial products, must be fully informed about thefinancial capacities of their consumers to ensure that the products or services offered are suitable for them.309The same Act also imposes fare-reaching information obliga- tions and the duty to fully disclose the risks of a financial transaction before the contract is signed (obligation to explain the financial product).310 Equally to the Japanese rules, the protection is not available to consumers who cannot demonstrate that thefinancial loss of subscribingfinancial products is not due to their inability to fully understand the financial product or service, or due to false, misleading or incomplete risk disclosure by thefinancial service supplier.
In Singapore information requirements vary depending on the type offinancial product at hand, going from product summaries and benefit illustration tables to
2015:93 where the Court found a marketing brochure misleading since it did not mention that the investment product in question included a so-called issuer risk related to the possible insolvency of the issuer even though the 217 pages prospectus included information on the issuer risk and had been approved by the authorities. In its judgment the Supreme Court emphasized the legislative history of the Market Securities Act and underlined that the correctness, coverage and method of presentation of disclosed information should be evaluated from the point of view of the investor.
307See the contribution of Nozawa to this book. Compare with the council obligation imposed on financial professionals in Québec; see more on this subject in the contribution of Arbour to this book.
308See the contribution of Nozawa to this book. See also on this point, Nakata (2016), p. 492, who questions whether the general suitability rule in the broad sense,“according to which the business operator must conduct his solicitation and sales in a manner that suits the consumer’s knowledge, experience and fortune etc., must be laid down as a general obligation”.
309Based on the responses to the questionnaire from professor Jiin Yu Wu, National Chengchi University, Taiwan,jywu@nccu.edu.tw.
310Also certain form requirements and requirements as to the content of the information are imposed. The foregoing is based on the responses to the questionnaire from professor Jiin Yu Wu, National Chengchi University, Taiwan,jywu@nccu.edu.tw, who further indicates that courts tend to formally assess the explanation obligation and the suitability test, often contenting them- selves in verifying whether the consumer has personally signed the explanatory note and the risk attribution scale. Compare with the study of Yan et al. (2017), p. 53, who conclude with regard to recent health law reforms in Taiwan that“it may not be possible for outsiders to properly interpret the information provided by hospitals. Thus, when a hospital discloses information, it is necessary for the government to consider the information’s applicability. Toward improving medical expertise and information asymmetry, the government has to reduce the burden among health service consumers in dealing with this information, and it has to use the information effectively”.
product highlight sheets. The aim of the latter is to summarise key information in simple and clear language. These product highlight forms may not exceed four pages, must use terms that investors can understand and must be of a font size of at least 10 Times new roman.311“Requiring an increased amount of information duties in the domain offinancial servicesfits in with the regulatory ethos of shifting the risk assessment to the consumer whilst educating him on how to do so. However, mandated disclosures with regard tofinancial contracts remain the exception to the rule”312in Singapore.
In Brazil any streamlining of information aboutfinancial products seems to be lacking despite practices are reported by which consumers are misled.313In China it has been debated until recently whetherfinancial consumers could benefit from the protective rules of the Consumer Protection Act. In 2015 a State Council’s regulation eventually issued guidelines that protect the consumer’s right to information and imposes transparency requirements.314Also the China Banking Regulatory Com- mission, the China Insurance Regulatory Commission and the People’s Bank of China have issued guidelines in 2016 imposing financial institutions to disclose information to consumers timely and in a manner that is easy to understand.315The idea of standardization offinancial information and disclosure of information about the key features offinancial products recently has gained ground in China. Also the courts’attitude towardsfinancial institutions’ obligation to inform consumers has changed in consequence of a Supreme People’s Court judgment of 2015 that interpreted the information duty offinancial institutions. According to the Supreme People’s Court the key feature for the evaluation of this duty to inform is the financial consumer’s understanding of the risks and interests offinancial products.
In order to assess whether afinancial institution has complied to its obligation both the objective average consumer standard must be taken into account complemented with a subjective standard which considers the risk level of thefinancial product concerned and the consumer’s personal situation. Thereby the burden of proof is placed on thefinancial institutions.316
Some national reporters indicate that the level of information disclosed to con- sumers in this field remains highly technical and is often no easy-read.317In that
311Based on the responses to the questionnaire from professor Gary Low, Singapore Management University,garylow@smu.edu.sg.
312Based on the responses to the questionnaire from professor Gary Low, Singapore Management University,garylow@smu.edu.sg.
313See the contribution of Donato Oliva to this book.
314A survey published in 2015 indicated that only 18.4% of the Chinesefinancial consumers was capable to fully understand their rights and duties after reading the terms and conditions of the financial services contracts. A survey issued by the people’s Bank of China in 2017 indicated that only 35.27% of the consumers believed that they had a good command offinancial literacy.
315See the contribution of Yang to this book.
316See the contribution of Yang to this book.
317See for instance the contributions of Piazzon, Benacchio and Arbour to this book who point out that information requirements have been spread over different laws and must be read together in
regard, the Irish authorities pay increasing attention to the layering of information through the use of pop-ups and hyperlinked texts. This digitised information provi- sion technique ensures that“the most important information for the consumer is
“provided upfront, in a form of summary disclosure. . .(then) there is a nesting of information, depending on how important it is to the consumer’s decision.”318It allows consumers to have more easily and more conveniently access to information and to retrieve a range of information.319Also the multiple warnings which result from the codes of conduct referred to above could be seen, at least to some extent, as a reaction to the risk of information overload as they focus much more on the manner in which key information elements are communicated.
“With regard to investment consulting, the dilemma of the need to give sufficient details for an informed decision about an extremely complexfinancial product and the limited capacities to process such information has led several German scholars to the idea of completely replacing the information model by one of legal regulation of financial products (e. g. via licensing)”.320Other German scholars also voiced the view of more“customer tailored”information that differentiates according to dif- ferent target groups.321
Although consumer education is often seen as key, not in the least by the European Commission,322 legal scholars remain sceptical. Financial education
order tofind out whether the requirements are complementary or not. Arbour refers to the Canadian Supreme Court trilogy hinting at the existing limited intelligibility of information disclosures, despite the legislative efforts that have been made to that extent. Piazzon more specifically criticises the Annual Percentage Rate (APR) for credits as overly complex and incomprehensible for an average consumer. Also doubtful about the usefulness of APR, Ramsay (2005), p. 50 and Garcia Porras and Van Boom (2012), p. 28. Benacchio points to the fact that the risks of somefinancial transactions are insufficiently clarified to consumers and that information cannot make good for inappropriate conduct offinancial professionals in the pre-contractual stage, which is difficult to document and thus to proof. As regards the APR, Benacchio seems to point out that this represents a good practice towards specific and simplified information indicators to the advantage of the consumer. In the same vein O. Bar-Gill sees a well-designed APR as part of a‘smart disclosure’-- policy, see Bar-Gill (2015), pp. 75–82. Also De Muynck (2010), pp. 1225–1226, pleads referring to Bar-Gill for a single APR disclosure in advertising. Schinkels, in his contribution to this book, sees the APR as an unidimensional yet meaningful criterion for the comparison of credit offers and thus a successful example of reducing complexity.
318See the contribution of Kelly to this book.
319In the context of e-commerce Québec law is reluctant towards the use of hyperlinks or multiple windows as they are likely to confuse consumers. The use of hyperlinks must therefore be avoided since a consumer too informed is also an uninformed consumer; see more on this point in the contribution of Arbour to this book.
320See the contribution of Schinkels to this book, who refers to Koch (2012), p. 485, Kửndgen (2011), p. 285; Klửhn (2006), p. 80 e.s.
321See the contribution of Schinkels to this book, who refers to Institut für Verbraucherjournalismus (ifv) GmbH an der SRH Hochschule Calw, Fasel (2018), p. 48.
322See Article 6 of the Mortgage Credit Directive 2014/17/EU and see the Commission Commu- nication of 12 May 2012:“A European consumer agenda–Boosting confidence and growth”, Brussels, COM(2012)225final, 9, “improving consumer knowledge is particularly important in financial services and an overall improvement offinancial literacy must be achieved”, and compare