Investments and pension plans
Not all companies on the financial market are monitored by the government. On what is known as the “grey” (unregulated) capital market, providers do not require a licence from the Federal Financial Supervisory Authority and only need to meet a few legal requirements. Investors are exposed to particular risks in this market. In order to make this clear, the Federal Government has made it a requirement for issuers of investments to provide a warning. Wirksam regieren examined whether investors notice and understand this warning in its current form. It discovered that the warning is understood, but often overlooked. Tighter requirements for where the warning is placed and how it is highlighted can make this information far more visible and thus significantly improve its impact.
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Investment counseling
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Making informed investment decisions
With the Small Investor Protection Act, the Federal Government improved investor protection for investments on the unregulated capital market in 2015. Among other things, this law obliges issuers to warn investors about risks and to highlight this warning. Before subscribing to an investment, every investor must sign to confirm that he or she has taken note of the warning. If subscription is done electronically, then the signature is replaced by the provision of personal data. The aim of these regulations is to help ensure that investors are aware of the risks and the possibility of losing their entire investment before deciding to invest.
Originally, only the wording of the warning and the process for electronic confirmation were laid down in law. The issuer decided on how the warning should be highlighted and where it should be placed. In practice, this led to the warning being presented in a wide variety of ways.
Different designs lead to different levels of visibility
Findings from perception psychology show that how important someone finds information largely depends on when they perceived it. In order for a warning to be effective, it should ideally be perceived as soon as possible, that is, before someone has decided to buy a product, for example.
In order to improve protection for investors, wirksam regieren conducted a study on behalf of the Federal Ministry for Finance in which it investigated which measures can be carried out to ensure that investors perceive the warning on investments at an early stage. First of all, four citizen focus groups developed various design options for warnings that are clearly visible and easy to understand. The impact of these designs was then reviewed in a representative online study.
Standardised positioning of the warning ensures visibility
An important finding was that the warning can be made far more visible primarily by having a standardised position for it at the top of the first page underneath the heading. People with less financial knowledge benefit most from a more visible warning. After perceiving it, people in this group invest far more conservatively.
Section 13(4) of the Capital Investment Act
“The information sheet on investments must contain the following highlighted warning on the first page, immediately beneath the first heading: “Acquisition of this investment asset entails significant risks and can lead to loss of the entire amount invested.”
With the amendments to the Capital Investment Act that entered into force on 22 August 2017, the design of the warning became more standardised, in part as a result of the findings from the study.
on behalf of the Federal Ministry of Finance (BMF)