Position Paper 01 March 2017
Designing a European Summary Prospectus using Behavioural Insights
CFA Institute advocates for more disclosure in order to advance our mission of market fairness, market integrity, and investor protection.
Overview
Related to one of the first elements of EU’s Capital Markets Union initiative, CFA Institute proposes summary prospectus template that aims to address information overload.
Introduction
CFA Institute has just released its proposed template for a European prospectus summary designed using behavioural insights.
As discussed in the report Designing a European Summary Prospectus using Behavioural Insights CFA Institute is proposing a template for the summary prospectus regime envisioned under the European Union’s prospectus regulation. The prospectus regulation is one of the first elements of the Capital Markets Union (CMU) initiative to reach the legislative stage, and it aims to improve the ability of European capital markets to support the wider European economy by making it easier to access public capital through improved and harmonized rules and regulations relating to prospectuses.
In designing our template for the summary prospectus, we wanted to address the issue of information overload, which is a common complaint against listing documents, by incorporating insights from the fields of behavioural economics and behavioural finance. In particular, we put the issue of framing at the forefront of our design. Framing is a phenomenon in which the reader’s attention can be drawn to or drawn away from certain information through formatting and design choices.
In our prospectus summary template, we place a lot of emphasis on the simplicity of the design and language used, the salience of the information presented, and the standardisation of the document to enhance comparability across issuances.
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Example of Formatting as a Guide
A good example of what this approach looks like on the page is found in the risk factors section of the prospectus. This section is often criticised in existing prospectuses when issuers take a “kitchen-sink” approach to identifying possible risks. The prospectus regulation prescribes a maximum of 15 risk factors to be identified — 5 in each of 3 categories relating to business risk, economic risk, and security risk.
We have used this section as a starting point to highlight our approach and placed each risk in a cell (see diagram below) that has a traffic-light colour-coded (red, yellow, green) heading that highlights the likelihood of the risk occurring, as well as the probably financial impact were the risk to actually play out. The risk factor description is kept concise by the restriction of having a fixed amount of page area to list all the risk factors.
The rest of the prospectus summary is designed with a similar cell-based approach. Apart from easing comprehension, this approach should allow the prospectus summary to be more easily tailored for presentations on computer monitors, smartphones, and print. The end result is a document that is six pages long, one fewer than that prescribed by the adopted prospectus regulation, leaving some breathing room for certain sections to grow or contract in length depending on the characteristics of each issuance.
Financial Impact
References
- Applying Behavioural Economics at the Financial Conduct Authority. Financial Conduct Authority London
- 2016 ESMA Report on Trends, Risks and Vulnerabilities Paris ESMA
- 2016 Behavioural Insights Applied to Policy European Commission Brussels, Belgium
- 2014 Review of Literature on Product Disclosure
- 2016 2016 Half-Year Financial Report
- 2011 Behavioural Finance and Investor Protection Regulations Journal of Consumer Policy Vol. 34 315
- 2016 Final Prospectus
About the Author
Sviatoslav Rosov, PhD, CFA, is director, capital markets policy, EMEA, at CFA Institute. He is responsible for developing research projects, policy papers, articles, and regulatory consultations that advance CFA Institute policy positions, focusing on market structure and wider financial market integrity issues.