In recent years there has been a global trend towards the adoption of uniform rules governing risk disclosure, particularly in relation to complex financial products.
In many common law jurisdictions, such as the United Kingdom and Australia, this trend has been reflected in the adoption of plain language techniques, a move towards short-form disclosure documents, and efforts to increase the quality of financial advice and the level of financial literacy on the part of retail investors.
The global financial crisis provided a timely reminder of the need to ensure that investors, particularly retail investors, have an under- standing of the risks associated with complex financial products. This became particularly clear after the collapse of retail investment products arranged by Lehman Brothers and marketed in Hong Kong and Singapore under the name “minibonds”. This product lost most of its value when Lehman Brothers collapsed in September 2008, destroying the life savings of many retail investors – ordinary citizens – who had invested in the product without appreciating the risks involved and, in many cases, assuming that it was as safe as a bank deposit.
The collapse of the product was a highly significant event in Hong Kong and Singapore. It brought investors out onto the street in protest and triggered an extensive regulatory investigation and review. In Hong Kong, it also led to the adoption of a comprehensive scheme to compensate investors for the losses they had suffered as a result of the inappropriate ways in which the product had been marketed and sold by banks and other distributors.
One of the particularly interesting things about the minibonds was that the prospectus had been drafted in accordance with the plain language guidelines in Hong Kong. However, the risks were still not well understood by investors. In fact, the crisis revealed that even when a prospectus is written in so-called plain language, there is a risk that investors will not fully understand the risks asociated with the product (even assuming that they actually read the prospectus).
This is particularly true in the case of a highly complex investment product such as the minibonds.
Plain language in English
In the English-speaking world, plain language (also known as plain English) has been around for many years and has provided legal drafters with guidance on how to draft a variety of legal documents. Plain language first arose in the area of consumer contracts as a means of removing the legalistic and archaic language that was traditionally found in legal documents. It was subsequently embraced by parliaments when drafting legislation and by lawyers when drafting commercial contracts.
In the context of securities regulation disclosure documents, plain English first appeared in the United States when the US Securities and Exchange Commission published a handbook in August 1998 entitled A Plain English Handbook: How to create clear SEC disclosure documents. The handbook called for legal drafters to observe certain principles when drafting disclosure documents, including the following:
• short sentences;
• everyday language;
• the active voice in place of the passive voice;
• tabular presentation or bullet lists for complex material;
• no legal jargon or highly technical business terms; and
• no multiple negatives (a technique much-loved by lawyers in the English speaking world).
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A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia