Joining the dots: PRIIPS, Sustainability Disclosures and the Consumer Duty

As we reported here, The UK government has confirmed that it will repeal the PRIIPs Regulation and empower the FCA to design a new UK retail disclosure framework. This announcement was made just 18 days before the introduction of the new Consumer Duty, a regime that explicitly intends to improve client communications by shifting the focus away from what is written on the page to what is understood by the reader. Elsewhere, the FCA is apparently close to finalising its new sustainability disclosure requirements and labelling regime. Communications, it seems, are the topic of the moment.

From a consumer protection perspective, this makes a lot of sense. In financial services we still see too many confusing, lengthy documents containing opaque language designed more to misdirect than give customers the information they need, in a form they can understand, to equip them to make informed decisions. Studies show that information may be 'clear, fair and not misleading', but remain poorly understood.

In the PRIIPs context, firms implementing the Consumer Duty have had to balance their obligation to comply with the prescriptive disclosure requirements of the former, whilst knowing that these documents will not satisfy the customer understanding outcome under the Duty. Firms have generally chosen to 'layer' documents they can demonstrate are better understood over the top of prescribed statutory wording. For example, research published in late 2022 showed that using a redesigned factsheet alongside a KIID significantly improved customer understanding of the sustainable features of investment products, compared to just using the KIID alone. However, the Duty also cautions against firms giving retail customers too much information, lest they become overwhelmed. There is a delicate balance to be struck.

The government's announcement that the FCA can effectively start again on retail disclosures is welcome. The FCA has said that, in both the retail and sustainability disclosure contexts, whatever the relevant final regimes look like, firms will need to comply with this and the Consumer Duty. Redesigning the PRIIPs regime give the FCA the opportunity to devise statutory wording that actually meets the Consumer Duty’s customer understanding requirements – or to remove statutory disclosure obligations altogether.

If prescribed or standard wording is retained, it should be tailored to the target market, use plain and intelligible language, make key information prominent and easy to identify, avoid providing too much information, take into account bias and be tested to demonstrate that it is indeed understood by the intended recipient. All of which sounds like quite a tall order. Yet this is the standard to which all firms will be held post 31 July 2023, so it seems only fair that the FCA lead by example.

This would leave firms with the more confined task of ensuring understanding for elements they add to communications, which are largely bespoke to an individual product. The easier it is for firms to comply with the Duty, the more likely they are to meet its requirements and the better the overall outcomes for consumers. Perhaps the PRIIPs review is an area to which the FCA's Consumer Duty Policy Team can usefully turn its attention to once the 31 July deadline has passed!