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Mandatory disclosure regimes are meant to be good for consumers. As Justice Brandeis of the US Supreme Court once famously wrote, “Sunlight is the best disinfectant, the electric light the best policeman.” He was arguing for greater transparency and for equality of information between the parties to transactions.
Brokers and other advisers are required to produce a number of mandatory disclosure documents by the National Consumer Credit Protection Act, the Privacy Act and other legislation. As holders of Australian Credit Licences, they are required to provide credit guides to consumers as soon as it appears likely that they are going to provide credit related services to them.
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As “credit assisters”, brokers are also required to provide credit quotes and credit proposals to consumers if they are engaged to provide credit assistance to them. Brokers must also keep a record of their preliminary assessments of the consumer’s suitability for any proposed credit and, if the consumer asks, must provide a copy of this assessment. Ironically, the number of disclosure documents mandated by the NCCP for credit assisters is more than that for actual credit providers.
Further, if, as part of the process of making a preliminary assessment, a broker accesses the credit reporting system through a credit reporting body, they must comply with the Privacy Act and have a published privacy policy, provide notices to consumers and obtain informed consents from them before dealing with their consumer credit and other personal information.
All of this mandated disclosure is designed to help consumers make informed choices. There is, however, a growing body of research both here and in the United States, in particular, which shows that too much information disclosure does not lead to more informed consumers. In fact, it can often confuse and mislead them. As Professor Justin Malbon of Monash University Law School said, in an article in the Australian Business Law Review, “The evidence shows that deluging consumers with enormous volumes of pre-contractual disclosure is a waste of everyone’s time.” Consumers may be “blinded by the light”.
Brokers usually engage lawyers to produce documents to comply with the disclosure requirements mandated by legislation and regulation. Many take a very conservative approach and tend towards over-disclosure for fear of missing something. There is also a tendency, whether using lawyers or not, to use standard form documents without adapting them appropriately to suit the different business models of credit licence holders. The result of both these tendencies is frequently very long and detailed documents which are not always relevant to either the consumer or the broker, and which consumers find difficult to understand, if they bother to read them at all.
One common error is to set out in detail the piece of legislation or regulation which requires a particular item of disclosure as an introduction to the mandated disclosure itself. This is almost always unnecessary and simply takes up more paper or screen space, confuses consumers and puts them off reading what may be important information later in the same document. Many disclosure documents currently in the market could do with some rigorous editing and still meet the mandated disclosure requirements. Indeed, some ASIC staff have expressed the view that some disclosure documents used by ACL holders are so voluminous as to defeat the purpose of the legislation and fail to comply with the requirement that they be expressed in clearly understood language.
The better approach is to carefully consider:
1) The business model of the credit assister/broker
2) What the consumer needs to know in order to make informed choices about their proposed credit product and the assistance the broker is providing
3) What the legislation and regulations prescribe
4) How to achieve this in the fewest number of words possible
Lawyers need to work with their broker clients to streamline their disclosure documentation so that it is easily understood by consumers, takes up less space and time and, ultimately, is more compliant with the intention of the legislation.
Dr Paul O'Shea, director and principal solicitor, O’Shea Lawyers
Dr Paul O’Shea has conducted some of the leading cases in consumer credit law. He has advised governments, consumer groups and industry. Dr O’Shea has published widely and conducted many seminars for the Queensland Law Society, state and federal governments and private agencies in Australia, Singapore, Thailand, Brunei and China, and is currently a member of the Investment, Life Insurance and Stock Broking Panel of the Financial Ombudsman Service. He also has advised other industry dispute resolution schemes and has been a member of the Banking and Finance Committee of the Queensland Law Society for more than 15 years. He is the author of The Legal Environment of Business, published by Thomson Reuters, and his most recent publication is a chapter on 'Regulatory Powers' in the 2013 Federation Press book Consumer Law and Policy in Australia and New Zealand.
