The Conduct of Financial Institutions (COFI) Bill shifts the regulatory test for disclosure from whether information was provided to whether the communication was effective in promoting customer understanding, says Billy Seyffert, the chief operating officer of Moonstone Compliance.
During Moonstone’s Regulatory Update Webinar earlier this year, Seyffert used the Bill’s disclosure provisions to illustrate what he sees as a broader shift from rules- and process-based regulation towards an outcomes-based conduct framework.
Although “continuous disclosure” is not defined in the Bill, he used the term as a practical way of explaining why disclosure may increasingly be viewed as part of an ongoing customer relationship rather than a once-off compliance event.
Seyffert said that continuous disclosure was only one illustration of the wider change. The same distinction between completing a prescribed process and demonstrating an outcome could apply to other requirements under COFI.
At the time of the webinar, his analysis was based on the publicly available 2020 version of the Bill. Although the Minister of Finance had given notice of the introduction of the Cabinet-approved version in Parliament, that version had not yet been released publicly. Seyffert cautioned that the later version could contain changes, although he expected the underlying principles to remain largely consistent.
From providing information to promoting understanding
Seyffert contrasted disclosure under the Financial Advisory and Intermediary Services Act with the approach he sees emerging under COFI.
In his experience, disclosure in the FAIS environment tends to occur around the pre-sale and sale stages. Compliance monitoring focuses on whether specified information was provided, such as information about commission, exclusions, costs, and underwriting requirements.
The question, as he described the current approach, is essentially whether the required disclosure took place.
Under COFI, Seyffert said, the focus would shift towards whether the communication was effective in promoting customer understanding.
The emphasis on understanding does not necessarily mean an institution could guarantee how every customer interprets a communication. Seyffert’s point was that institutions may increasingly have to demonstrate that their disclosures were designed and delivered in a way that promoted understanding.
This could affect both how compliance is planned and how it is monitored. Instead of relying principally on retrospective checks of whether specified information was provided, institutions may increasingly have to determine beforehand what their disclosure is intended to achieve and consider how its effectiveness will be evaluated.
As Seyffert put it, compliance monitoring would increasingly ask why the institution considered its disclosure effective. This reflects the broader move from measuring whether an activity was completed to assessing whether it achieved its intended outcome.
The disclosure paradox
Seyffert said traditional disclosure regulation proceeds from a relatively straightforward assumption: if customers receive sufficient information, they should be able to make informed decisions, leading to better outcomes.
Disclosure has also been used to address information asymmetry, based on the principle that markets function better when customers have access to sufficient information to make decisions.
However, research in behavioural economics and consumer behaviour has highlighted limitations in this model. Customers may not read disclosures, may not understand or remember them, may experience information overload, or may focus on short-term considerations despite receiving adequate information.
This produces what Seyffert called the “disclosure paradox”. As products become more complex, regulators may require more disclosure, but additional disclosure can result in longer and more complicated documents, reduced engagement, and lower comprehension.
“The challenge is not insufficient information, but ineffective information,” he said.
Regulators could respond to these limitations in various ways, including requiring additional disclosure, restricting products, increasing governance obligations, focusing on customer outcomes, and encouraging ongoing customer engagement. Seyffert’s view was that COFI appears to combine several of these regulatory responses.
Continuous disclosure is consequently not the entire response. It is one component of a wider shift towards assessing whether firms’ conduct produces the intended customer outcomes.
Section 31(1): disclosure across the relationship
Seyffert used section 31 of the Bill to demonstrate how this emerging approach could operate in practice.
Section 31(1) provides that, before, during, and after the conclusion of a contract for a financial product or financial service, a financial institution must make a financial customer aware of all relevant facts that could reasonably be expected to influence the customer’s decisions relating to that product or service.
Seyffert identified two significant aspects of the provision.
First, the obligation is not confined to the point at which a product is recommended or sold. The express reference to the period before, during, and after the conclusion of a contract points towards communication across the life of the customer relationship.
Many financial products involve relationships that continue for years after the initial transaction. During that time, customers’ circumstances, objectives, knowledge, and risk profiles may change, as may product features, costs, and risks. Information that was appropriate when the customer entered the product may therefore become less relevant or effective as the relationship develops.
This raises practical questions about what information may need to be communicated after onboarding, how firms should identify changing disclosure needs, and what systems would be required to support ongoing communication.
Second, he focused on the requirement to make the customer aware of “all relevant facts” that could reasonably be expected to influence the customer’s decisions.
The relevant information would depend on the customer and the product or service concerned. Seyffert identified benefits and risks, costs and charges, contractual obligations, the consequences of failing to meet those obligations, and recourse mechanisms as examples.
He also pointed to information that could affect decisions over time. An age-rated premium, for example, may have one significance when a customer enters a product and another as premiums increase over the longer term.
The question therefore extends beyond whether prescribed information was delivered to whether the information was relevant to the customer’s decision-making.
Seyffert also questioned whether a customer could be regarded as aware simply because a disclosure document was provided or signed. In his interpretation, section 31(1) moves the focus from the delivery of information towards the effectiveness of the communication.
Section 31(2): how disclosure takes place
Section 31(2) addresses how disclosure must occur.
It requires disclosure to use language that is clear, plain, and unambiguous, and appropriate for the target market. Disclosure must also be adequate, appropriate, timely, relevant, complete, factually correct, and not misleading or deceptive.
It must promote understanding of the financial product or service and comparison across similar products or services. The nature and complexity of the product or service, as well as the reasonably assumed knowledge, understanding, and experience of the customers at whom the disclosure is directed, must be taken into account.
For Seyffert, this means the quality of disclosure becomes as important as its content.
A document containing the required information is not necessarily the same thing as communication that promotes understanding.
“We used to provide information. Now we have to promote understanding,” he said.
The form and level of explanation would not necessarily be identical in every case. Section 31(2) refers both to the nature and complexity of the product and to the reasonably assumed knowledge and experience of the target market.
Technical language may be appropriate in communication between sophisticated financial institutions, for example, but not for a retail target market with less financial knowledge and experience.
Seyffert said complexity informs the disclosure requirement under an outcomes-based and proportionate regime. A more complex product may require more detailed disclosure and more time spent explaining its features.
This product-level proportionality formed part of a wider risk-based approach described by Seyffert. He said the size of an institution would not necessarily determine the risk it posed. A large institution could offer a simple, lower-risk product, whereas a small business could deal in complex financial instruments or move significant amounts of money.
Seyffert also linked effective disclosure to the advice process. In his view, communication should do more than identify costs, exclusions, risks, and other product features. It should help the customer understand why those matters are important and, where advice is provided, how they relate to the suitability of the product.
This forms part of what he described as a move towards decision quality, rather than disclosure quality alone.
Section 31(3): responsibility beyond direct channels
Section 31(3) extends the disclosure requirements to certain disclosures made by third parties on behalf of an institution or in relation to its products or services, where the institution is aware, or ought reasonably to be aware, of the disclosure.
Seyffert said the reference to what an institution “ought to be aware” of introduces a proactive oversight expectation.
His example was an insurer using an independent distribution channel to communicate with customers. In his interpretation, the insurer would need appropriate oversight to ensure that disclosures made through the channel met the applicable requirements.
The provision therefore extends the issue beyond the person communicating directly with the customer and into the institution’s oversight of third-party distribution.
Seyffert placed this oversight expectation within a broader move from individual compliance obligations towards governance systems. Distribution arrangements may consequently become a governance issue rather than only a matter of individual intermediary compliance.
He also saw a role for product suppliers in supporting advisers with disclosure information, documentation, and processes that would make it easier to provide advice in a compliant and customer-centred way. He presented this as an opportunity for industry collaboration, rather than as a specific requirement contained in section 31.
Why ‘continuous disclosure’?
Seyffert said Moonstone Compliance had coined the term “continuous disclosure” to bring together the implications of sections 31(1), 31(2), and 31(3): communication before, during, and after the conclusion of a contract; requirements concerning the quality and effectiveness of that communication; and accountability for certain disclosures made by third parties.
The concept also reflects the Bill’s broader emphasis on ongoing governance, monitoring, review, customer engagement, and accountability.
Seyffert identified the customer journey as including pre-sale engagement, the sale, the ongoing relationship, periodic reviews, product changes, and exit.
Continuous disclosure, in this sense, is intended to maintain customer awareness and support decisions throughout that lifecycle.
The concept should not, however, be interpreted as requiring institutions simply to communicate more often. Seyffert identified the need to balance communication frequency against the risk of information overload as one of the practical challenges institutions may face.
Effective lifecycle disclosure would therefore concern the relevance, timing, form, and effectiveness of the communication, rather than its volume alone.
From documentation to evidence
Taken together, Seyffert said these features illustrate five connected changes in the future conduct framework:
- from transactions to relationships;
- from disclosure to understanding;
- from rules to outcomes;
- from documentation to evidence; and
- from individual obligations to governance systems.
He illustrated the broader conduct model as a progression from governance and product design through customer communication and understanding to customer decisions and, ultimately, customer outcomes.
This changes what institutions may need to demonstrate.
Evidence would no longer be confined to proving that a disclosure document had been delivered. On Seyffert’s analysis, it could extend to what was communicated, when it was communicated, to whom it was communicated, and whether the communication was effective.
He identified governance structures, oversight of customer communication frameworks, monitoring and evaluation of disclosure effectiveness, identification of potential customer harm, escalation of material concerns, and accountability throughout the organisation as relevant considerations.
Monitoring alone would not be sufficient, he said. Institutions would also have to evaluate what the information showed about the effectiveness of their communication and consider whether changes were required.
The challenge would not necessarily be to keep more records, but to identify what should be documented as evidence of the outcome being pursued.
Systems and technology, governance and oversight, record-keeping, and the capacity to balance the need for communication against information overload would all be practical considerations. Seyffert said continuous disclosure could consequently require both cultural and operational change.
Preparing without pre-empting the final framework
For Seyffert, the significance of continuous disclosure lies less in the term itself than in what it reveals about the direction of conduct regulation: a growing emphasis on ongoing accountability, customer understanding, customer outcomes, and effective governance.
The practical implications will depend on the final legislative provisions and the conduct standards that give effect to them. Seyffert therefore cautioned firms against building detailed compliance processes around requirements that had not yet been finalised.
He nevertheless encouraged institutions to examine their existing disclosure frameworks, customer communication journeys, governance arrangements, monitoring and review processes, and capacity to produce documented evidence.
The central questions are whether customers are being kept appropriately informed and whether the institution could demonstrate this to the regulator.
This does not require firms to predict the eventual detailed requirements. It requires management to understand the direction of the conduct framework and consider whether the institution can explain how its communication, oversight, monitoring, and escalation arrangements operate in practice.
“Continuous disclosure is not merely a concept; it’s a window into the future,” Seyffert said.
