Speaking at a conference held by the Centre for International Finance Regulation in Sydney, UNSW Professor of Law Dimity Kingsford-Smith said empirical evidence shows financial citizens can be incapable of financial self-provision due to financial illiteracy or behavioural heuristics and biases and therefore the financial citizen needs both “support and protection”.
Professor Kingsford-Smith therefore argued the “philosophy behind such heavy reliance on disclosure regulation should be reconsidered”.
She said, particularly in the case of end-user products such as managed funds, “justifications for investor or financial consumer protection are at least as relevant as disclosure for information efficiency and price discovery”.
“The justifications for investor protection do not end with disclosure and as Campbell and Wallace acknowledged, disclosure requirements don’t always represent a clear alternative to other forms of regulation and I think we should be thinking about that more,” said Ms Kingsford-Smith.
Internationally, Ms Kingsford-Smith said financial regulation is generally moving towards greater protection for investors.
“In the UK and more generally in Europe regulators are now developing and in some places beginning to use principals which they promulgate to issuers about how they might develop a product so that it is suitable for the audience to which it is targeted,” said Ms Kingsford-Smith.
Ms Kingsford-Smith said along with these principals are product intervention powers that are similar to stop order powers.
She said while ASIC already uses stop order powers to stop distribution and marketing where there is disclosure deficiency, these product intervention powers would be used “not just where there is deficiency in disclosure but where there is a deficiency in the match between the characteristics of performance expected for the product and group it is tied to”.
She said both the principals and the product intervention powers are intended to “design products which don’t take advantage of the fact that individuals have difficulties in overcoming behavioural and literacy problems in getting to grips with many of the more complex and often unsuitable products”.
