Commentary: Educate crypto retail investors rather than test them

APPROACHES IN OTHER MARKETS

In other countries, regulators have also tried to use assessments or detailed disclosures of investments risks to protect retail investors. 

In the UK, for instance, the Financial Conduct Authority has required people advising on investments to ensure the recommendations are suitable for their customers. Companies must obtain enough information to understand whether the investor has the knowledge and capacity to understand and bear the risks.

In the European Union, the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation requires delivery of a standardised Key Information Document (KID) that provides investors with information about a product before they purchase it. The KID is supposed to inform investors and enable them to assess the products better.

Brokerage firms in the US also provide voluminous documentation, both to inform investors and to protect themselves against risks. Many investment websites and brokerage firms also offer free online questionnaires that are supposed to help customers invest better.  

These solutions, however, have showed less than stellar results. Researchers at the Rand Corporation found, for example, that more detailed disclosure documents have not been effective at helping consumers make informed choices in mutual funds due to investors’ limited attention or limited understanding of the material.  

Boston University professor Tamar Frankel similarly found that disclosure requirements for investors in the US failed to achieve their objectives due to the complexity of the financial promises, the copious disclaimers, and the drive of salespersons to emphasise promised gains. The net result, Frankel said, is a disastrous failure of disclosure to produce the anticipated results.  

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And in the UK, Aegon pensions director Steven Cameron told Money Marketing that the advice and guidance gaps have arguably gotten worse after the requirements started because of the complexity of what was required.

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