A key aspect of saving and investing is the regulatory environment. The Retirement Commissioner’s 2016 Review (accessible here) made no reference to the major changes that have been made to the disclosure regime as it affects collective investment vehicles (CIVs).
The new PDS regime: Over recent years, New Zealand has moved from a prospectus/investment statement regime to a licensed adviser, licensed manager and ‘product disclosure statement’ (PDS) regime.
The objectives of this new regime were to create fair and efficient markets and to put the interests of the investor first.
A PDS has size requirements in that there are limits on the number of pages and the number of words used (no more than 12 pages for a ‘collective investment vehicle’ or managed fund or no more than 6,000 words). Also, many of the words are prescriptive with issuers having limited opportunities to tailor the disclosure documents to their requirements. The content is prescribed and, therefore, rules-based and not principles-based.
Few would dispute that the old disclosure documents (prospectus and investment statements) were not read by investors, even ‘professional’ investors. Even if they were read, the level of understanding was probably limited.
We suggest that the new, shorter PDSs are also unread. Likewise, even if read, it is highly unlikely that an investor can gain a complete picture of the investment on offer and the true risks they will be exposed to.
One goal of the new regime was to make it easier to compare products and, to an extent, it achieves that. It is easier to compare fees and features, such as contributions, withdrawal provisions etc. However, it does not make it easy to understand investment strategy and philosophy except at a high level.
Investment categories: A PDS must disclose investment categories but these are artificially constrained, presumably to simplify the PDS. Two examples illustrate the problem with this kind of ‘simplification’:
 See here for a consumer-oriented explanation of the PDS from the Financial Markets Authority.
 For example, just to pick two KiwiSaver providers: for BNZ, the PDS has a very low priority on the main BNZ KiwiSaver web page (here), being buried as a link in a ‘Small print’ section at the bottom of the page; the same applies to the ANZ (see here). In other words, the PDS seems to be a compliance document rather than a primary piece of communication.
On these issues, the prescribed PDS disclosure illustrates the dangers of ‘simplification’ – what looks like ‘simple’ has become ‘simplistic’ and has actually got in the way of relevant communication.
Risk indicators: The PDS must show a ‘risk indicator’ for each of the funds on offer (as an example, see here for the BNZ KiwiSaver Scheme’s PDS at page 5). The government forces providers to identify the ‘risk’ of a product and capture that in a single number (from 1 ‘lower risk’ to 7 ‘higher risk’).
We think the ‘Risk indicator’ is misleading and unhelpful and should be eliminated. It assumes that the saver’s relevant investment timeframe is 12 months (not the actual case). It also uses investment returns that are different from those advised to savers in their fund updates. Finally, it is based solely on volatility and is unrelated to the actual returns earned by the fund. It tries to simplify the issue but ends up as a simplistic label.
Effective communication? The Retirement Commissioner’s 2016 Review did not look at the question of how well members were served by the new regime nor whether it had improved the managers’ practices. It also did not look at the additional compliance costs imposed on the industry but that are ultimately passed through to the investor.
Research indicates that different people learn and comprehend information in different ways. Logic suggests therefore that having a single, prescriptive disclosure regime targets, at most, only one part of the community. A better alternative would be a principles-based regime where providers of services or the sellers of products are required to achieve ‘understanding’ outcomes. This would require the regime to identify:
We suggest that it is really unhelpful for the Financial Markets Authority to say “Ask questions and make sure you understand the product before you invest” (from here). That may have satisfied the old disclosure regime but it adds nothing to the new. It’s one of those ‘comfort’ statements that read well but make no practical difference to a saver’s information needs.
The FMA has launched its ‘Investor Capability Strategy for 2015-2018’, in conjunction with the Commission for Financial Capability and the financial services industry (see here). The announcement again seems to be ‘top down’ – telling savers what the FMA thinks that savers need to know/do. We think it should be focussed on what savers actually know and what they are actually doing. Armed with that information, the FMA should be in a position to build a picture of current shortcomings and possible improvements.
The ‘Disclose Register’ – a step in the right direction
The government has established the ‘Disclose Register’ (here) that gathers in one searchable spot all the official documents of every CIV. These include PDSs, financial statements, the providers’ constitutional documents and the descriptions of key contracts; also, each CIV’s ‘Statement of Investment Performance and Objectives’. Providers are legally obliged to keep this information up-to-date.
We think this is a constructive step and suggest that it be extended to cover investment returns and fees.
In summary: We think that the overall process started by the FMA six years ago is just a step and the FMA probably accepts there is a long road still to travel on disclosure issues. The old regime was founded principally on legally protecting providers from savers rather than helping savers to make appropriate decisions. The new regime is better in some respects but worse in others. It is still not member-centric.
 One of the required statements in the old ‘Investment Statements’ was “Investment decisions are very important. They often have long-term consequences. Read all documents carefully. Ask questions. Seek advice before committing yourself.” There is no evidence that prospective investors did any of those things.
 As of 1 May 2017, there were only 1,844 with an AFA qualification in the whole of New Zealand (see here for the list) and of those, 603 were employed by a KiwiSaver provider.
 An RFA is allowed to give advice on simpler financial services such as mortgages and insurance services and so they are not relevant to retirement saving issues.
 A QFE is employed by the financial service provider and is only allowed to talk to customers about the provider’s own products.
 The closest we were able to get on these kinds of questions was the FMA’s Statement of performance expectations 2017-2018 (accessible here). The FMA cited survey results that 63% investors of all kinds (not just managed funds) were “confident in the quality of regulation of New Zealand’s financial markets.” (at page 6). That was up from 46% in 2014/15 (see here at page 3). That doesn’t come close to what we think is needed. There were, however, eight pages devoted in the Statement of performance expectations to the FMA’s own ‘Forecast financial statements’.