by Susan Edmunds
PDSs were brought in with the Financial Markets Conduct Act. They are meant to provide an easier-to-understand outline of how financial products work, including the risks and returns involved and any fees and charges.
Investors must be given a PDS before they hand over any money.
The FMA has released new research on investors’ use of the PDS, which shows that while they felt the documents were an improvement over previous disclosure information, they still thought they could be repetitive and long, the language could be academic and they struggled to find the key information to help their decision-making.
Garth Stanish, FMA director of capital markets said, “The significant work issuers have put into PDS documents is paying off, with investors paying attention to the information. The PDS is a significant improvement to the previous disclosure regime and this research provides valuable insights from investors into how the PDS can be improved further.”
While financial information was viewed as critical, many investors told the FMA this part of the PDS was overly complex rather than providing useful information. One investor told researchers, “it gets a bit much after a while. I leave that to my broker.”
Investors also wanted the key risks section of the PDS to reflect risks that were unique to the offer and give explicit detail on how this may affect their investment returns. Investors suggested this would help companies be more self-aware and clear about their ability to deliver the returns they promise.
Issuers were told to consider simpler language, include analysis and commentary, focus on more specific risks and consider how to disclose information such as ESG reporting.
Thirty-nine per cent of investors read some of the PDS and 19 per cent said they read all of it. Those with prior investing experience were more likely to trust the PDS. Just over 40% said the PDS was “about the same” in terms of relevancy to their decision-making compared to other offer documents.
Investors also explained that they wanted to see more detailed information about the company and its management, especially about a company’s board of directors and senior management.
Adviser Alistair Bean he assumed his clients would not read a PDS in full.
“I take my clients through a PDS as best I can, pointing out what the investment is, what they are investing in, how much it will cost, associated risk comparisons to other investments and so on with further research as required. For existing products, past performance is purely historical although a good indicator, dependent on current market conditions.
“What I particularly look for who are the directors - have they been bankrupted or banned from being a director, previous companies - and what other disclosures are they giving. Also, what, if any associated debts of any issuance of the product.”
Another adviser, Brent Sheather, said it was not worth reading too much into the research.
"It's just based on a survey of 12 people and every one of those are members of the shareholder NZ Shareholders Association whom are obviously a bit more engaged with investment matters and in particular individual shares than your average retail investor.
"This was confirmed by the fact that the only products they looked at were IPOs, bond offers and property syndicates and the majority of these investors were male and over 60 years of age."
He said fees were not fully disclosed.
The Ministry of Business Innovation and Employment has also released a discussion paper outlining its plans for disclosure regulations under the new regime, including around fees.
You can read the details, including plans to make commissions publicly available, here.
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