Short and Sweet or Just Short? The Readability of Product Disclosure Statements
Abstract
Given the importance of information in making informed financial decisions, it is vital that investors are able to understand the information provided to them. With this in mind, in 2013, New Zealand legislators replaced the existing disclosure documents with the Product Disclosure Statement (“PDS”). The change was in response to large and complex disclosure documents from providers of new or ongoing sales of financial products. PDS documents have a strictly enforced word limit and are meant to be written in plain English to allow “prudent but non-expert” investors access to the information they contain. We compare the readability of the old prospectus and investment statements (the disclosure documents legally required before 2013) with the new PDS for a sample of superannuation mutual funds (referred to in New Zealand as KiwiSaver funds). We find that while the documents are definitely shorter, there have been mixed improvements in the readability of the documents. The main improvements are a reduction in the amount of finance terminology used, while the language in PDSs compared to investment statements is actually more complex, likely driven by the word limit. As a result, while investors require less finance knowledge, they appear to require a higher level of general education to understand the documents, potentially putting the information out of reach of over half the general population.
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