Transparency in banking: the KID does not really inform investors

As the saying goes: the eyes don’t lie. And this can also help us understand investors. But let’s take it one step at a time. When banks or advisers propose an investment, they are required by European regulations to provide the KID (Key Information Document), a summary form that should explain the product’s features and risks in a clear, comparable and non-technical manner. To give you an idea, more than 8 million KIDs were submitted to Consob last year. Yet the reality is that these documents are almost always difficult to understand and indecipherable, discouraging in-depth reading and misleading savers.

To investigate the reasons behind this ineffectiveness empirically, a recent study involving 79 Italian adults analysed the impact of linguistic and visual presentation on financial decisions, using eye-tracking technology. These are the findings of the study ‘Usable Documents Help People Make Better Investment Choices’, coordinated by Stefano Rastelli, director of the Laboratory of Linguistics and Experimental Language Teaching at the University of Pavia, which is currently being published. Based on this experiment, the CRTcu (Centre for Research and Protection of Consumers and Users) will submit a proposal to the European Commission to amend the pre-contractual information sheets for packaged retail and insurance-based investment products (PRIIPs).

The data from the experiment showed that confusion does not stem from investors’ lack of understanding or their age, but from the very wording of the documents, which appear to be designed (as explained) to confuse or hide important information within dense blocks of grey text. According to Rastelli, today’s financial jargon is not intended to truly inform: ‘It is not a language meant to be understood or read, but rather a language that serves as a disclaimer, a “decorative language”. And KIDs are a language of decoration, a language that must be there simply for the sake of being there, not to be read’. Consequently, people tend to ignore crucial textual warnings and focus almost exclusively on the numbers, ending up underestimating the real risks or, paradoxically, rejecting valid products. For example, one error that is highlighted is that the “recommended holding period” is perceived as a mandatory and insurmountable constraint, and many reject that investment because they do not want to be tied down.

To demonstrate that a change of direction is possible, the researchers redesigned the documents by applying specific cognitive usability rules that halve the mental effort required. Three fundamental linguistic principles were applied: always making the subject clear from the outset (aboutness), clarifying ‘who does what’ by highlighting the dynamics of the actions, and extracting the ‘core of the sentence’ using concrete, vivid words that the investor can recall in the few seconds before signing. Visually, percentages were placed before the euro amounts, risk warnings were extracted from the text and highlighted, and universal colours were adopted, such as red for losses and green for gains. The textual changes were drastic and direct, eliminating abstract concepts. Rastelli illustrates this shift emblematically: ‘Instead of writing, as a heading, “stress scenario”, “unfavourable”, “favourable”, we wrote “if the market goes badly”, “if the market goes reasonably well”, “if the market goes well”. The word ‘scenario’ doesn’t tell you whether it’s a real thing or a made-up thing.” The impact of these usability changes was immediate: faced with such clear consequences, savers altered their choices and “the percentage of those who refused to invest among our experimental subjects doubled.”

Making financial documents cognitively usable is no longer merely a stylistic choice; it has become a vital standard for protecting citizens and, at the same time, a genuine ‘commercial asset’ capable of instilling confidence and encouraging appropriate investment. The urgency of moving towards fully transparent communication is also confirmed by the legal and practical implications, as demonstrated by a recent case in Trentino-Alto Adige where an 80-year-old pensioner, supported by the CRTcu, managed to recover €80,000 from a bank because the ACF deemed the signed document illegible and incomprehensible. On the need to safeguard these rights, Carlo Biasior of the CRTCU calls for systemic change: “To gain investors’ trust, clarity must be paramount, capable of making the characteristics, nature and risks of financial products clear even to the least financially literate. We hope that the recent EU strategy, aimed at encouraging investment in European markets and capital, will lead to strengthened investor protection, including through the introduction of accessible language, developed in collaboration with consumer representatives.”