Hiding In Plain Sight: Dumb Disclosure
There is an ever increasing amount of “consumer protection” regulation that forces disclosure of an ever increasing amount of information. Instead of achieving its stated goal, all that happens is we have endless pages of disclosure documents that are read only by lawyers looking to pick holes in them and find some failure of disclosure. Consumers don’t read them, and in fact everything in there is hiding in plain sight. If we want to actually help consumers, then we should design rules around disclosure that actually benefit them.
It won’t help anyone to fill endless pages of useless information. One of the most ridiculous examples is in Product Disclosure Statements where all potential risks of the investment need to be set out. Are you investing in property? Then you need to disclose that the property could burn down or that the property market could perform worse than at present or that a tenant might not be secured. Notwithstanding that these are obvious and fundamental aspects of investing in property, they still must be included. The latest inclusion for all PDSs is a warning about the potential impact of COVID on investments. Surely that warning must be there for that solitary person in the world who is not yet aware that COVID could be a risk. The obviousness of a risk is apparently greater reason for its inclusion. That is to say, if a risk was so evident, then that obviousness is all the more reason for using more text space and including it. This is all apparently in aid of making the end user “fully informed” about their risks.
An endless stream of bland statements is not in any way useful. Its impenetrability makes it a net negative for the reader. A reader who no doubt must sign somewhere, or multiple times, that they are “fully informed and have understood everything presented to them”. Or perhaps to get around the possibility that it is impenetrable they will be required to get a solicitor, accountant or financial advisor to sign off that that solicitor, accountant or financial advisor has explained to them everything and that they have understood it, thereby transferring the risk of misunderstanding and potential liability onto that solicitor, accountant or financial advisor.
Why Dumb Disclosure Exists
Useless disclosure harms a consumer because they still cannot really understand it, the volume makes it more difficult to try and understand, and there is no one who is genuinely trying to help them understand notwithstanding the apparent purpose of the disclosure. The disclosure regime serves three parties:
- The regulator who now feels that they are important and useful and is able to justify their salary (a salary at the expense of others);
- Lawyers who must work out how to comply with the dictates of the regulator and draft endless reams of disclosure;
- Lawyers for potential plaintiffs who will examine those same documents and look for potential admissions.
This dark triad of industry drives up the cost of whatever it is they get involved in pricing out consumers while moralising how much good they do for the world.
The first thing to do to remedy this is to understand we exist in a world of imperfect information. Not everything can be known not every risk can be quantified or stated. We live in a world of uncertainty, and that is okay. We should also remember that a human is not good at weighing up a large set of competing variables. That is the job of a regression, ie thinking by a machine. Having competing sets of disclosure that are subtly different across a hundred different variables is practically incalculable for a human. To present something for a human for a risk assessment you need to keep the number of variables as small as possible. Humans makes decisions based on heuristics, rules of thumb, and simple narratives. That is how we deal with the complexity in the world. By having a small number of salient pieces of information presented it enables the human to apply a heuristic to the risks that they are trying to weigh up.
How to Properly Inform
Writing should be to the point. No disclosure should be more than two pages of text.
Where there is technical material that requires specialist knowledge, or is unlikely to be understood by the subject audience, then the appropriate response is to have a professional explain matters to them. This should not be for the purpose of removing an avenue of attack that the consumer has but instead purely for the benefit of the consumer. How do we achieve understanding other than by a check list? By having the well established fiduciary relationship between the advisor and client. An advisor whose job it is to explain something who do their earnest best to do so. The advisor should create the heuristic for the client. It is not helpful for an advisor to go through an endless stream of technical analyses.
One example of this that I’ve seen is debate over how much a lawyer must explain a Will to a client. It is important for a client to understand the effect of a testamentary instrument that a lawyer drafts for them. Some say that this means that the client must understand every single paragraph. Therefore where there is a long testamentary instrument particularly one that includes testamentary trust or multiple testamentary trusts then the client must be walked through every single paragraph of many dozens and dozens of pages. Where that is too time consuming or the client is unlikely to understand all of those paragraphs then the testamentary instrument is cut back substantially. For this reason some lawyers will draft testamentary discretionary trusts across a few lines. As compared to a standard modern discretionary trust that might run from 10 to 20 pages.
In my opinion this view is in error. The job of the advisor is to create heuristic that a human understands. It is not to disclose to them the effect of every single paragraph. If the client understands the nature and general effect of the testamentary trust that is established for them, and creates a rule of thumb as to how it works, then that is actually a very useful piece of human understanding. It is unhelpful to go through a 20 page trust deed in detail and attempt to explain two pages of powers that are given to the trustee so that it may invest in stocks and bonds, mortgage property, and conduct business. Although it might seem that to go through a document with a client in great detail is to help them understand, it is the same as giving them a 200 page PDS and thinking that an investment is now explained.
Give unto machines that which belongs to machines
Useless disclosure is the domain of machines and not humans. It is inevitable that where the dark triad of regulators, drafters and plaintiffs cause ever growing wads of text, that machines will develop to read, analyse and generate this useless disclosure. Just as only machines can read the vast sums of numerical data that is generated in many areas, so too will endless streams of text be eventually the domain only of machines. For humans, and for the benefit of human consumers we should make information accessible again.