Matthew Smith
Thorndon Chambers
PO Box 1530
Wellington 6140
New Zealand
Barrister
Tel:
Fax:
6th Floor
10 Customhouse Quay
Wellington
(64 4) 499-6040
(64 4) 499-6118
e-mail: matthew.smith@chambers.co.nz
DISCLOSURE-BASED REGULATION
Law & Economics Association of New Zealand
Wellington Seminar, 20 May 20131
1.
INTRODUCTION AND CONTEXT
1.1.
Information disclosure is a regulatory device which provides users of a
good or service (‘consumers’) with relevant information about the
consequences of using it.2 Its purpose will often be to warn consumers
about possible negative effects of using a particular good or service, so that
those effects can be taken into account before they ‘transact’. Seen in this
way information disclosure (when it is effective) can lessen the need for
regulators to resort to a blunter regulatory device, such as an outright ban of
a good or service, or the specification of minimum design standards for it.
1.2.
Disclosure-based regulation comes in many forms. Examples include
prescribing standard test protocols, the results of which must be published
(eg, at the point of sale in terms which can be compared with other goods
of the same type or model); producing comparative information and
1
2
I wish to acknowledge Assistant Professor of Law Yesha Yadav from the Vannderbilt Law School, who offered
helpful comments and suggestions on an earlier draft of this paper. All errors are however mine and mine alone.
Tobias Maugg, “Out of the dark: the role of information disclosure regulation in New Zealand”, (Oxera paper,
Sept. 2002), available online: http://www.oxera.com/Oxera/media/Oxera/downloads/Agenda/Informationdisclosure-regulation.pdf?ext=.pdf (last accessed 9 May 2013), at 1. See similarly David Weil, “The Benefits
and Costs of Transparency: A Model of Disclosure Based Regulation” (17 July 2002), available online:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=316145 (last accessed 15 May 2013), at 2 (“disclosure
policy involves a government authority requiring the collection and dissemination of standardized information
from identified businesses or other organizations at regular intervals for the purpose of changing the behavior of
the information disclosers as well as in some instances information users”).
publishing ratings; requiring a label warning, list of contents, or summary
of legal rights associated with a good or service; and publishing special
materials to convey technical information more simply to the public, such
as by way of ‘fact books’ explaining information that may be difficult for a
non-expert to understand or that is otherwise unavailable in one place.
1.3.
Set out in an Appendix to this paper is a summary of statutes currently in
force in New Zealand and which provide for disclosure-based regulations.
They show that our common approach is to provide in primary legislation
for regulations to be made requiring the disclosure of specified information,
such regulations being backed up in turn by criminal sanctions in the event
of non-disclosure, or in the case of false or misleading disclosures. In these
statutes one can see a helpful template, at least as a starting point, for the
design and operation of future disclosure-based regulations.
2.
REASONS TO USE DISCLOSURE
2.1.
The (economic) incentives associated with greater information flows are
likely to improve the operation of markets and, in doing so, stimulate
competition and innovation – all good things. Disclosure-based regulations
can also provide helpful information to regulators, which can be used to
further refine regulatory policies and practices, or to raise public awareness
of issues hitherto off the (political) radar. These potential benefits of
disclosure-based regulation are expanded on below.
(2A) To correct market flaws (information asymmetries)
2.2.
For markets to operate efficiently, all parties need reliable information.
Ideally, normal market forces govern how producers and suppliers of goods
and services (‘sellers’) disclose information.3 But while competition might
induce sellers to publish information about the positive qualities of their
goods or services, the negative qualities like potential defects or risks are
unlikely to be referred to by sellers in their advertising materials.4 This
3
4
But note that although economic analysis of markets often assumes ‘perfect’ information, “clearly the
phenomenon never exists in the real world; some degree of uncertainty as to present or future facts must always
be present”: Bronwen Morgan and Karen Yeung, An Introduction to Law and Regulation: Text and Materials
(Cambridge: Cambridge University Press, 2009 reprint), at 24.
Morgan and Yeung, at 25.
2
causes ‘market failures’ which are characterised by the poor flow of
information. These failures can result because the effects of poor product
choices are ambiguous or hidden, because gathering data is costly (not
profitable),5 or because no sellers have a sufficient incentive to disclose.
2.3.
Where a market is characterised by sub-optimal information, disclosure
requirements can help to strengthen the flow of information from sellers to
consumers to correct the imbalance of information, encourage informed
choices and promote market efficiency.6 Disclosure is designed here to
generate the ‘optimal’ amount of information, and may in doing so address
external costs (‘externalities’) which may be efficiently dealt with by
informing consumers about the externality to enable them to take steps to
avoid it, rather than by prohibiting or restricting the regulated activity.7
(2B) To improve management and firm performance
2.4.
Information disclosure might be intended to improve the performance of
managers, by providing information that can be used to monitor agents, by
creating information that managers would otherwise not have available to
them, or by forcing firms to confront facts by making them gather data – on
the theory that managers will pay attention to things they are forced to keep
track of.8 Information disclosure might also help to improve corporate
governance more generally, the reasoning here being that:9
It provides directors more information by which they can evaluate the strength
of the company and the performance of the officers; it strengthens the role of
auditors in their own watchdog role; it enhances the effectiveness of
shareholder voting and shareholder litigation as constraints on corporate
governance; and it permits the governmental oversight agencies to perform
more effectively.
5
6
7
8
9
Mary Graham, “Information as Risk Regulation: Lessons from Experience” (HKS Regulatory Policy Program,
May 2001), available online: http://www.hks.harvard.edu/m-rcbg/research/rpp/RPP-2001-04.pdf (last accessed
13 May 2013), at 10. See also Paula J Dalley, “The Use and Misuse of Disclosure as a Regulatory System”,
(2007) 34 Florida State University Law Rev 1089, at 1109.
Graeme Austin, “The Regulation of Consumer Credit Products: The Effects of Baseline Assumptions”, in Susy
Frankel (ed.) Learning from the Past, Adapting for the Future: Regulatory Reform in New Zealand (Wellington,
LexisNexis, 2011), at 296; Graham, at 10; Dalley, at 1109; Zohar Goshen, “The Essential Role of Securities
Regulation”, (2006) 55 Duke Law Journal 711, at 740 (“disclosure duties subsidize search costs and facilitate a
competitive market for information traders. As competition among information traders intensifies, the ability of
each individual information trader to exploit informational advantages diminishes”).
Morgan and Yeung, at 96. Mandatory disclosure may have positive synergies. In the securities context, for
instance “a competitive information market generates increased demand for firm-specific information, which in
turn provides managers with incentives to make timely and elaborate disclosures beyond what is mandated by
law, in an attempt to capture the benefits of increased coverage by information traders”. See Goshen, at 739.
Dalley, at 1111, 1130. See similarly Weil, at 6.
Dalley, at 1099 (quoting Robert B. Thompson, “Corporate Governance After Enron”, (2003) 40 Houston Law
Review 99, at 111).
3
(2C) To regulate lawful conduct (behavioural ‘nudges’)
2.5.
A further possible benefit of disclosure-based regulation is that it may be
used to alter lawful behaviour, such as the level of production or
consumption of a good or service, in a beneficial way.10 Graphic warnings
on cigarette packets is arguably one such example, it being intended to
highlight the health effects of smoking and thereby reduce its incidence
without the need to take the drastic step of banning cigarettes.11 Related
goals may be to improve the quality or reduce the price of a good or
service,12 or allow cooperation amongst firms by making information about
innovations available for further development and challenge and testing.13
(2D) To make fraud or misrepresentation harder
2.6.
Information disclosure can also be justified as a requirement which
increases the effort required to commit fraud or misrepresentation.14 In
anonymous markets, where it can be easier for sellers to deceive,
information disclosure requirements can prevent harms like insider
trading.15 In order to satisfy the market’s demands where there are
disclosure requirements, defrauders must also construct fundamental
aspects of business and “present a veneer of plausibility”.16 Common sense
suggests that as the amount of information available in marketplaces
increases the likelihood that individual pieces of false information will be
able to mislead anyone decreases.17 Disclosure requirements should in
theory also provide earlier warning that things are going wrong.18 This has
application for instance to the Christchurch Rebuild, as concerns grow
about fraud and possible secret commissions.19
10
11
12
13
14
15
16
17
18
19
Dalley, at 1110.
See Barak Orbach, Regulation: Why and How the State Regulates (New York: Foundation Press, 2013), at 778
(stating that tobacco companies “have never voluntarily disclosed information about the negative effects of
smoking and effectively denied them for decades”).
Dalley, at 1110.
Dalley, at 1130.
See Morgan and Yeung, at 96; Dalley, at 1099.
Goshen, at 738 (“the more information that is disclosed, the lower the risks associated with both insider trading
and estimating the fundamental value of the firm”).
Dalley, at 1099.
Dalley, at 1099.
Dalley, at 1099.
Refer for instance to Tamlyn Stewart, “Rebuild fraud targeted in initiative”, The Press (19 October 2012);
Hamish Fletcher, “Get tough on corruption – SFO”, NZ Herald (14 May 2013).
4
2.7.
Note that as a related but incidental benefit, mandatory disclosure
requirements in helping to make fraud and manipulation harder to commit,
also help to preserve the value of services offered by intermediaries like
financial analysts and protect the reputations of intermediaries. This point is
helpfully made by Goshen in the context of offerings of securities:20
Because fraudulent and misleading statements distort analysts’ predictions and
dilute the value of their analysis, investors who purchase the financial analysis
are clearly adversely affected by the misstatements. Realizing that analysts’
predictions could be skewed by fraud or misstatements, investors will trust
analysts less and adjust downward the price they are willing to pay for their
services. Worse yet, the distortions caused by fraud and manipulation will
tarnish the analysts’ reputation, making it harder for them to recover their
costs. Restrictions on fraud and manipulation protect the value of analytical
products and the reputation of analysts. Like mandatory disclosure duties,
restrictions on fraud and manipulation also create a virtuous cycle. By
reducing information traders’ precaution costs, restrictions on fraud and
manipulation facilitate entry into the information traders market and thus
increase competition among information traders. The enhanced competition
will, in turn, increase the probability of detecting misstatements and fraud, and
thereby reduce the incentive for corporations to engage in fraud or
manipulation. The reduced incentive to release misleading information to the
market will further decrease information traders’ precaution costs, and so on.
(2E) To provide information for regulatory use
2.8.
Information disclosures can also be intended to be used by and to improve
the operation of government itself.21 As regulators need information to
design and enforce direct regulation systems, and as this information may
not be broadly published, disclosure-based regulation can change that.22
This thinking seems to be behind information disclosure in terms of Part 4
of the Commerce Act 1986, where disclosure helpfully provides a set of
standardised regulatory accounts and non-financial information the
CommComm can use as part of its price-quality regulation.23 The
information also allows the CommComm to evaluate the effectiveness of
the system, which helps in turn in assessing whether further regulation may
be required as well as to refine the approach to regulation over time.24
20
21
22
23
24
Goshen, at 742-43.
Dalley, at 1110-11.
Dalley, at 1111.
Maugg, at 3.
Maugg, at 3
5
(2F) To increase public awareness of an issue
2.9.
Finally, information disclosure may be used in an attempt to generate
interest in the information itself.25 To take an example from the U.S., it has
been suggested that the Security and Exchange Commission’s continuing
attempts to improve the disclosure of executive compensation packages
may reflect its hope that eventually investors will start paying attention to
the matter.26 Similarly, national garment labels such as the “New Zealand
Made” label27 are generally intended, at least in part, to raise consumer
awareness of the conditions under which particular goods are produced.28
3.
UPSIDES TO DISCLOSURE-BASED REGULATION
3.1.
Information disclosure is often attractive to regulator and regulated parties
(‘regulatees’) alike. Three common reasons for why this is so are, first, the
relatively lower costs entailed in disclosure-based regulation when
compared to other types of regulation; second, the potential information
disclosure has to stimulate competition and innovation for the net benefit of
society; and, third, the personal empowerment aspect of disclosure. These
potential upsides are considered in more detail below.
(3A) Less expensive
3.2.
If information disclosure can displace or supplement more ‘substantive’
regulation, such as design standards or prohibitions, compliance costs will
almost always be lower. This is because substantive regulations often
require the redesign of a good or of a production process, which will mean
costs and disruption for regulatees. While the costs of disclosure are not
zero (costs are involved in creating, compiling, and publishing information,
for instance),29 they are normally lower than mandatory specifications – for
instance, a regulatory requirement to retrofit a particular technology to
existing plant in order to achieve reduced carbon emissions.
25
26
27
28
29
Dalley, at 1112.
Dalley, at 1112.
See http://www.buynz.org.nz/.
Dalley, at 1112.
A point noted for instance by Morgan and Yeung, at 97; Cass R Sunstein, Risk and Reason: Safety, Law, and the
Environment, (Cambridge: Cambridge University Press, 2004 reprint), at 260-61.
6
3.3.
Administrative costs should also be lower with disclosure-based
regulations, including for the reason that information disclosure might
remove the necessity for more regular plant inspections or regulator
investigations and audits, with associated costs to regulators and regulatees.
3.4.
On top of cost savings for regulatees and regulators, disclosure-based
regulations offer cost savings for consumers.30 Mandatory disclosure
requirements reduce search costs because it is cheaper for regulatees to
disclose than for outsiders to unearth regulatee-specific information.31
Disclosure by a regulatee also prevents duplicative investments in
(undisclosed) information by consumers and their advisers, in effect
subsidising search costs for all consumers. Finally, disclosure-based
regulation can have the advantage of allowing consumers to exploit
economies of scale in analysing standardised information from all firms in
a regulated market. Goshen draws on these benefits to conclude:32
[T]he public good characteristics of information produce a benefit for the
market: the small investment made by the [regulatee] in disclosure of
information effects enormous savings in search costs for all information
traders.
(3B) Pro-competitive
3.5.
In helping to stimulate competition amongst sellers of goods and services
for improved quality or performance, information disclosure can encourage
innovation – replacing centralised government decisions with informed
freedom of choice amongst many users, and stimulating competition
amongst sellers of goods and services for improved quality or performance.
It can also give the regulated sellers broad choices not only about how and
how much to change practices, but also about whether to change them.33
30
31
32
33
See Goshen, at 758-59.
As Goshen notes, producing firm-specific information is an integral by-product of effectively managing a
business, and the added cost of disclosing it is marginal.
See Goshen, at 758.
Graham, at 11. See also Goshen, at 756 (“First, information disclosed by a corporation provides value to actual
or potential competitors, and enables them to evaluate their position vis-à-vis the disclosing corporation and
respond to the disclosed information (e.g., stop or accelerate research and development, change marketing or
pricing strategy, or enter or exit a market). Second, disclosure provides value to creditors, employees, suppliers
and consumers of the disclosing corporation, allowing them to improve their negotiation position vis-à-vis the
corporation. Third, the information provides value to prospective investors who are not current shareholders of
the corporation, allowing them to better compare the corporation with alternative investments in composing a
portfolio that might exclude or include the corporation’s securities.”) (internal citations omitted).
7
3.6.
Take the following example.34 If a regulator requires sellers of a particular
good to publicly rate hidden factors according to a standard test procedure,
consumers of the good will be able to make better informed purchase
decisions. As consumers alter their purchasing decisions in light of this new
information, sellers have a new market incentive to compete for that
business by enhancing the rated qualities. If the rating methods are well
chosen and accurately reflect the qualities they are intended to rate, not
only should competition increase, but the overall quality of the goods and
services offered in the market should improve and further innovation
should be encouraged – possibly going beyond what could have been
mandated by a regulatory intervention setting fixed design specifications.
(3C) Personally empowering
3.7.
If information disclosure leads to greater innovation and higher quality
goods and services, it should in turn help to ensure that consumers have
greater choice amongst goods and services than they otherwise would.35 In
this respect information disclosure has the advantage that goods or service
choice is based on personal preference, not limited by government. This
comports with the political philosophy that individual choice should be
preserved as much as possible while avoiding direct government
interference,36 and may appeal to those whose orientation is to address
market failure without disturbing other beneficial features of the market.37
4.
LIMITS TO DISCLOSURE-BASED REGULATION
4.1.
While information disclosure is attractive to regulators and regulatees
(including for the reasons just noted) it does have its limits. One is the
potential for mandatory disclosure to clash with legally recognised rights to
34
35
36
37
Taken from Project on Alternative Regulatory Approaches, Information Disclosure: A Practical Guide to the
Use of Information Disclosure as a Regulatory Alternative (September 1981), at 5-6.
Note Weil, at 29 (disclosure-based regulation “is appealing to those who oppose other forms of regulatory
intervention because it provides a means of changing behavior that appears more flexible and therefore less
onerous than traditional command-and-control or even performance based regulatory systems”).
Dalley, at 1093. Further note Sunstein, “The Storrs Lectures”, at 34 (“A central argument, applicable to any kind
of paternalism (soft or hard, means or ends), is that errors are more likely to come from officials than from
individuals. Public officials lack the information that individuals have.”).
Dalley, at 1093. Although note W Kip Viscusi, “Risk Equity”, in Matthew D Adler and Eric A Posner (eds.),
Cost-Benefit Analysis: Legal, Economic and Philosophical Perspectives (Chicago: University of Chicago Press,
2001), at 17 (“Policies of persuasion that attempt to browbeat individuals into changing their behaviour are
often ineffective and are almost invariably undesirable from a policy standpoint. Excessive warnings stimulated
by a desire to fend off liability burdens also may distort risk comparisons across products”).
8
privacy and confidentiality – a legal limit. Another is the potential for
cognitive biases consumers have to defeat the very purpose of having better
information before transacting – a practical limit. There will also be
contexts in which disclosure-based regulation in itself will not be sufficient.
(4A) Legally protected information
4.2.
Starting with legal limits, mandatory disclosure has the potential to clash
with legal protections of sensitive information of a business/commercial,
personal or cultural kind, in circumstances where confidentiality may have
a claim to priority.38 This is important for regulators because clashes
between disclosure and the need to protect sensitive information can lead to
distortions in information disclosure which might compromise its
effectiveness as a regulatory device.39 Note in particular the potential for
legal challenges to disclosure-based regulations, at least in cases where
such regulations are not incorporated directly into primary legislation.
4.3.
As to sensitive business/commercial information, some statutes do
specifically recognise that it may not be appropriate for a regulator to
publish this.40 There is however no general statute restricting the
publication of information having this character. The New Zealand Bill of
Rights Act 1990 (NZBORA) is notable here in not containing a property
rights protection per se. To the benefit of regulators, it also recognises in s
14 the freedom “to seek, receive, and impart information”. That freedom
must however be read in light of other NZBORA rights. One might argue
for instance that sensitive business/commercial information should be
protected through s 21 (freedom from unreasonable search and seizure), or
s 27 (right to justice). These NZBORA rights are available to legal persons/
companies too (s 29), and s 21 in particular has been used to protect from
search and seizure documents covered by legal professional privilege.41
38
39
40
41
Morgan and Yeung, at 97; Orbach, at 760.
Graham, at 23.
Examples include s 53ZG of the Commerce Act 1986; s 161 of the Animal Products Act 1999; s 30 of the
Canterbury Earthquake Recovery Act 2011; and s 47 of the Industry Training Act 1992.
Refer for instance to Director of the Serious Fraud Office v A Firm of Solicitors [2006] 1 NZLR 586 (CA),
particularly at [135]-[143] per O’Regan J (as he then was).
9
4.4.
Although note for interest sake Fogarty J’s observation in Dempster:42
It is common place for regulators when conducting [] enquiries to be made
privy to confidential commercial practices having commercial value, by
providing assurances that the practices will not be disclosed to other persons.
(Ironically, the regulators can sometimes find that parties A, B and C all think
they have their own special way of doing things, but their way is in fact
common.)
4.5.
Turning to personally sensitive information, important limits to disclosure
of information of this character are set out in the Privacy Act 1993, and in
particular in the information privacy principles in s 6 of that Act. These will
be relevant when designing disclosure-based regulations. The courts have
also recognised that while privacy interests are not as such amongst the
fundamental rights affirmed in the NZBORA, they are recognised in
international human rights law as well as in our judge-made common law.43
This might justify the courts in appropriate cases ‘reading down’
ambiguous information disclosure regulations to uphold privacy values.
4.6.
Finally there is culturally sensitive information. As to this, s 20 of the
NZBORA guarantees the right of “minorities” in New Zealand “to enjoy
the culture, to profess and practise the religion, or to use the language, of
that minority”. While there is very little case-law on this right, the courts
have indicated that Māori cultural rights are protected by s 20.44 On this
footing, s 20 might be relied on to ‘read down’ ambiguous disclosure
regulations so as to limit the public dissemination of culturally sensitive
information. Such an approach finds support in that taken in the Historic
Places Act 1993 in relation to wahi tapu sites and wahi tapu areas. It is to
ensure that New Zealand’s historical and cultural heritage should “Be fully
researched, documented, and recorded, where culturally appropriate”.45
42
43
44
45
Dempster v Registrar-General of Land HC Auckland CIV-2005-404-3178, 2 December 2005, at [61] per
Fogarty J.
Refer for instance to Brooker v Police [2007] 3 NZLR 91 (SC), at [122] per McGrath J.
Refer for instance to Takamore v Clarke [2012] NZSC 116, at [12], [100]-[101] and Ngati Apa Ki Te
Waipounamu Trust v R [2000] 2 NZLR 659 (CA), at [82], both per Elias CJ. This position is consistent with the
one taken by the UN Human Rights Committee in its decisions on the comparable right in Article 27 of the
International Covenant on Civil and Political Rights, in respect of which it is accepted both that Māori qualify as
a “minority” and that activities can be “cultural” even if undertaken for economic gain, provided that they are
“an essential element of the culture”. See Mahuika v New Zealand (No. 547/1993: 15 November 2000).
Quoting s 4(2)(b)(iv) of the 1993 Act.
10
Similar approaches can be seen in the Walking Access Act 2008,46 and in
the Health (Cervical Screening (Kaitiaki)) Regulations 1995.47
(4B) Heuristics and biases
4.7.
Even in the absence of legal limits to information disclosure, there may be
real practical limits on the ability of disclosure-based regulations to play the
role a regulator desires for them. Research in psychology and behavioural
economics has identified a number of mental shortcuts, or ‘heuristics’,
which affect our ability to receive, store and process information and to
make objectively rational decisions based on it.48 Many of these are
relevant to disclosure-based regulation.49
4.8.
Take the ‘availability’ heuristic as an example. It leads people to respond to
information based on the ease with which instances or associations can be
brought to mind,50 leading for instance to people overestimating the risk of
a particular kind of accident after seeing or hearing about such an
accident.51 The availability heuristic means in this context that while
disclosure requirements can present novel and therefore theoretically more
available information to consumers, that information may not in fact be
used unless it is also brought to the consumer’s direct attention at or close
to the time they decide whether to purchase a particular good or service.52
4.9.
A related heuristic is ‘anchoring’, which leads people to rely too heavily on
the first piece of information which comes to mind (the ‘anchor’) when
making decisions. Once an anchor is set, other judgments are made by
46
47
48
49
50
51
52
Section 10(2) provides that “If the [New Zealand Walking Access] Commission is aware that a site is culturally
sensitive, it must consider whether it is appropriate to publish a map or information indicating the location of the
site before doing so”.
Regulation 5(3)(B) provides that “In determining whether or not to grant an approval under this regulation [to
disclose protected information], and in determining what conditions (if any) should be imposed on any such
approval, the [National Kaitiaki] Group shall have regard to the following matters: … (b) The need for
culturally appropriate protection for the taonga of protected information “.
Refer for instance to Daniel Kahneman, Thinking, fast and slow (London: Penguin Books, 2011); Christine
Jolls, Cass R Sunstein and Richard H Thaler, “A Behavioural Approach to Law and Economics”, in Cass R
Sunstein (ed.), Behavioural Law and Economics (Cambridge: Cambridge University Press, 2007 reprint), at 1351; Cass R Sunstein, “The Storrs Lectures: Behavioral Economics and Paternalism” (29 October 2012),
available online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2182619 (last accessed 15 May 2013).
Although note Cass R Sunstein, “Cognition and Cost Benefit Analysis”, in Matthew D Adler and Eric A Posner
(eds.), Cost-Benefit Analysis: Legal, Economic and Philosophical Perspectives (Chicago: University of Chicago
Press, 2001), at 237 (“What seems to be a cognitive error may turn out, on reflection, to be a judgment of value,
and a judgment that can survive reflection”).
Dalley, at 1114.
Dalley, at 1114.
Dalley, at 1114.
11
adjusting away from it, and there is a bias toward interpreting other
information around the anchor.53 For example, the initial price offered for a
used car sets the standard for the rest of the negotiations, so that prices
lower than the initial price seem more reasonable even if they are still
higher than what the car is really worth. Anchoring can be made worse in
turn by self-serving biases, which prevent people from accepting or
adjusting to relevant information because the information adversely affects
their personal interests or contradicts their pre-existing beliefs.54 Research
in this area has also relevantly indicated that people will often accept
information from unreliable sources, and that anecdotes are often far more
influential than statistics in decision-making.55 Behavioural studies also
show that people may engage in ‘herd’ behaviour, which occurs when
people follow what they know or perceive to be the behaviour of others
rather than engaging in independent decision-making.56
4.10.
Finally, behavioural research suggests that more information is not
necessarily a good thing.57 This is reflected in the ‘information overload’
phenomenon, which occurs when an excess of information causes a
decision-maker to reject or ignore useful information and instead make an
ill-informed decision.58 Behind this phenomenon is the idea that while an
increase in the usefulness of information leads to better decisions, more
information in general leads to higher costs of processing the information.59
It follows that increasing the amount of useful information available can
actually result in people making worse decisions as the costs of processing
new information become too great.60 The volume and accessibility of
information available through the Internet, some of it being at best of
dubious quality, has the potential to add to the risk of information overload.
53
54
55
56
57
58
59
60
Refer for instance to Sunstein, Risk and Reason: Safety, Law, and the Environment, at 263-64.
Dalley, at 1114.
Dalley, at 1114-15.
Refer for instance to Dalley, at 1115; Timur Kuran and Cass R Sunstein, “Controlling Availability Cascades”, in
Cass R Sunstein (ed.), Behavioural Law and Economics (Cambridge: Cambridge University Press, 2007
reprint), at 374-75; Goshen, at 714, 724 (discussing “noise traders” in the securities context, who are defined as
individuals “who act irrationally, falsely believing that they possess some valuable informational advantage or
superior trading skills” and will act “as individuals or as a group” following “fads, rumors, and investment
strategies that bear no economic rationale, such as chasing random price movements in day trading”).
Sunstein, Risk and Reason: Safety, Law, and the Environment, at 262-63.
Dalley, at 1115.
Dalley, at 1115.
Dalley, at 1115.
12
(4C) Overriding public good
4.11.
Finally, regulators should not lose sight of the fact that in some contexts
information disclosure might be inadequate as a regulatory response to a
(policy) problem – as for example when greater safety is a public good.61
Sunstein gives the following helpful illustration of this limit:62
Imagine, for example, that the replacement of carcinogen X with same product
Y would benefit all workers simultaneously because all of them would
simultaneously be exposed to Y rather than X. Imagine too that each worker is
bargaining separately with the employer. In that case, no individual employee
may have a sufficient incentive to decrease his demand for wages and other
benefits to obtain increased safety. Because the benefits of the new substance
are provided to everyone, no individual employee will ‘pay’ enough to obtain
them, preferring instead to take a free ride on the efforts of others. The result
will be too little safety on conventional economic criteria. Here a regulatory
response is appropriate.
5.
REGULATORY DESIGN CONSIDERATIONS
5.1.
An understanding of the aims for any information disclosure system, as
well as the context in which it will operate, is fundamental to ensuring that
the system as designed will be effective as a regulatory measure.63 Set out
below are four important questions persons charged with the design of
disclosure-based regulations might find it helpful to ask and answer.
5.2.
In asking the questions which follow it should be borne in mind that, in
design terms, a system might involve the regulator imposing standards of
performance for disclosure and leaving the design of the most costeffective method and media strategy to regulatees. For instance, a
performance standard might specify the target audience that must receive a
particular message at a certain level of awareness, and leave the details of
creative execution to regulatees to develop. The advantage of such an
61
62
63
Orbach, at 763. Refer also to George Loewenstein and Peter Ubel, “Economics Behaving Badly”, New York
Times (14 July 2010) (“As policymakers use [behavioral economics] to devise programs, it’s becoming clear
that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some
cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful
but more effective solutions rooted in traditional economics. … Behavioral economics should complement, not
substitute for, more substantive economic interventions. If traditional economics suggests that we should have a
larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether
consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks. But that’s the
most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of farreaching policies we need to tackle our nation’s challenges.”).
Sunstein, Risk and Reason: Safety, Law, and the Environment, at 263 (internal citations omitted).
Dalley, at 1091, 1128.
13
approach is that the means of compliance are left to the private sector (with
its incentives to innovate), so long as regulatory goals are actually met.64
(5A) Question #1: Can I use disclosure?
5.3.
As noted in Section 4A above mandatory disclosure has the potential to
clash with protections the law accords to commercially, personally or
culturally sensitive information. The possibility for a regulatory clash with
these competing interests should be identified in advance, and a disclosure
system should be designed to strike an appropriate balance between the
competing interests – having regard to the particular regulatory goals.
Regulators should also ask themselves whether information disclosure will
be adequate as a regulatory response. As noted in Section 4C above,
disclosure may be insufficient where greater safety is a public good.
(5B) Question #2: Have I got clear goals?
5.4.
The fact that a disclosure system may appear to be less intrusive than
substantive regulation should not excuse a regulator from stating its goal,
not least because the goal of the disclosure system will determine the
mechanisms by which it will best operate.65 If the goal of a disclosure
system is to provide more information to consumers, investors, or the
public, the regulatory purpose must also address why that information will
be useful to an underlying regulatory goal and why it is not currently
available.66 The answers to those questions will help to identify not only
whether disclosure will in fact be fit for purpose in the context, but how so.
(5C) Question #3: Will my ‘market’ support it?
5.5.
If a disclosure system is intended to operate through a market, the market
should be identified and assessed for whether the information to be
mandatorily disclosed will be sufficiently salient and in sufficiently usable
form to reach and to have an effect on the behaviour of market participants
– either directly, or through the operation of intermediaries who can help to
64
65
66
See Sunstein, Risk and Reason: Safety, Law, and the Environment, at 282-85.
Dalley, at 1129.
Dalley, at 1129.
14
collect and interpret the information which is disclosed, and in doing so
reduce its cost, or simplify information disclosed in technical formats.67
5.6.
Common market-related considerations will be whether the market in issue
is sufficiently competitive that consumers have meaningful choices,68 and
whether sellers have an incentive to react to changes in demand (ie,
inquiries into product substitutability and elasticity of demand).69 In
considering whether sellers have an incentive to react to changes in
demand, an assessment might usefully be made of whether existing
technology makes demand-driven adjustments possible in fact.70
5.7.
If the ‘target audience’ is firms, their common structures should also be
taken into account in designing disclosure-based regulations.71 Particular
consideration should be given here to the way in which managers in firms
are likely to receive, process, and act on new information.72 As a starting
point, individuals in a firm will be subject to all the biases and cognitive
quirks described above. But the structure of the firm itself can also
influence decisions.73 For instance, senior managers may have an incentive
to enhance the firm’s profitability because they have invested considerable
personal capital in the firm or because their compensation may be tied to
the firm’s financial performance.74 Therefore, theoretically they have an
incentive to respond to economic stimuli such as consumer preferences. In
a large and complex organisation, however, detailed information about
consumer preferences may not be available to senior managers.75 And
67
68
69
70
71
72
73
74
75
For example, environmental groups in the U.S. use disclosed government data concerning toxic pollution in the
Toxics Reductions Inventory (TRI) to create factory rankings and risk profiles that are electronically searchable
by zip code. See David Weil et al, “The Effectiveness of Regulatory Disclosure Policies”, (2006) 25 Journal of
Policy Analysis and Management 155, at 162. This is explained further in Weil, at 7-8 (“TRI requires that
manufacturers disclose the quantity of emissions of defined toxic pollutants on a quarterly basis. The provision
of this information on toxic emissions by manufacturers is provided to the ‘public’ but in fact works through
specific user communities who compile and use the data in their interaction with the disclosing party. These
users then employ that information to demand greater source reduction from the disclosing party by means of
political channels such as public pressure (e.g. via the media), use of other public regulatory authority (e.g.
zoning, state environmental policies), or community organizing. Alternatively, users may act through markets,
such as exerting pressure via capital markets or product choices… This in turn is intended to affect the behavior
of the manufacturer and encourage efforts at source reduction or other means of pollution reduction.”). In the
securities context, see to similar effect Goshen, at 738.
See Weil et al, at 175-76.
See Dalley, at 1120-21, 1130; Weil et al, at 175-76.
Dalley, at 1121.
Dalley, at 1118.
Weil et al, at 164.
Dalley, at 1118.
Dalley, at 1118.
Dalley, at 1118. There may also be difficulties discerning consumer signals (behaviour change) from other
‘noise’. For instance, studies show that many retailers analyse point-of-sale data in rudimentary ways – so food
15
employees with access to consumer information may not have the same
incentives or employment goals as employees responsible for designing the
firm’s goods or services, or determining its trading policies and practices.76
(5D) Question #4: Is my ‘audience’ influenceable?
5.8.
A closely related consideration is the content and format of the information
to be disclosed. This should be carefully assessed by the regulator, with
particular regard being had to the likely heuristic biases of the target
audience and, where relevant, the biases of any intermediaries relied on.77
5.9.
As set out in Section 4B above the mechanisms by which information
affects behaviour are complex.78 Information must therefore be provided in
a form accessible to and usable by the target audience.79 Timeliness,
comprehensibility and saliency of information are all relevant here.80 In
particular, information to affect decisions must be provided in a timely
manner and in a location where users can find it before they make relevant
decisions.81 Making information widely available in the public domain will
however not necessarily generate benefits.82 That is because, for many
target audiences (especially lay persons) the information disclosed will
need to be actually interesting and useful for them to take it into account.83
5.10.
All of this tells against the disclosure of incomplete or imbalanced
comparative information, overly technical information, or information that
contains too much jargon. As to these points, note that the Ministry of
Consumer Affairs has relevantly indicated (as a conservative estimate) that
45% of adult New Zealanders are functionally illiterate.84 While it should
always be borne in mind that oversimplification can lead to
misunderstanding, our high rate of functional illiteracy does suggest the
76
77
78
79
80
81
82
83
84
manufacturers may believe that declining sales of high-sugar cereals indicate that a competitor’s advertising is
more effective, whereas shoppers may actually be responding to nutritional data. Refer to Weil et al, at 164.
Dalley, at 1118-19.
Dalley, at 1130.
Dalley, at 1091.
Dalley, at 1091.
Refer for instance to Sunstein, “The Storrs Lectures”, at 50.
Weil et al, at 161. As Weil et al note, availability of information at a time and place where users are accustomed
to making decisions increases the chances information will become embedded in routines (eg, fuel economy
ratings on new car stickers are more accessible than rollover ratings on a government Web site).
Weil et al, at 157.
Dalley, at 1120.
Austin, at 308 (footnote 69).
16
existence of a risk that use of excessive detail might make disclosure
meaningless to lay persons, at least without the assistance of intermediaries
to ‘translate’ more complex information into simpler messages.85
5.11.
Note too that presentation, typeface, and design have all been found to
make a significant difference in the usefulness of information – as
advertisers well know.86 This is reflected in the FMA’s recent Guidance
Note: Effective Disclosure (2012), which emphasises the need for clear,
concise and effective disclosure documents in the offerings of securities
context.87 Research also finds that people tend to be more easily persuaded
by oral communications or communications that engage the emotions, than
by written or abstract information.88 This further suggests that techniques of
effective presentation as used in mass advertising should be considered by
regulators looking to ensure information disclosure systems are effective.
6.
THE INTERNET’S IMPACT
6.1.
This brings us to the World Wide Web. The Internet is obviously relevant
to any information-based disclosure system, and its potential implications
should in all cases be considered when designing a disclosure system. In
particular, the Internet can be used to promote effective disclosure of
complex information to a broad audience in three ways.89 First, it can
provide easier, faster, and more complete access to information that might
influence choices or spur collective action.90 Second, it can create increased
capability to integrate information from many sources to produce a more
comprehensive picture of diffuse information.91 Third, the Internet because
85
86
87
88
89
90
91
While the form of disclosure may differ depending on whether it is targeted at end consumers, or instead
directly to more ‘literate’ intermediaries, such as market professionals, who will digest and advise on the
information, it should not be forgotten that heuristic biases can affect professional advisors as well as ordinary
investors and consumers. See Dalley, at 1105.
Dalley, at 1125.
Financial Markets Authority, Guidance Note: Effective Disclosure (2012), available online:
https://www.fma.govt.nz/media/1105126/guidance_note_-_effective_disclosure_june_2012.pdf (last accessed
17 May 2013), at 16-20. This Guidance Note helpfully sets out in table format plain language techniques to
consider using in disclosure documents, as well as examples of concise presentation to consider.
See Dalley, at 1114, 1117; Sunstein, Risk and Reason: Safety, Law, and the Environment, at 265.
Graham, at 11.
Graham, at 11; Weil, at 24 (“Lowered cost of acquiring information through new technologies, increased
experience and other factors that may create economies of scale in information acquisition”), 26 (“the increasing
use of the Internet as a means to deliver information represents a significant downward shift in the marginal cost
function for information users”).
Graham, at 11.
17
it is interactive creates the potential for diverse users to customise
information to serve their particular needs.92
6.2.
As one commentator has noted, the Internet might be harnessed to allow
homebuyers to use simple digital maps to pinpoint neighbourhood sources
of risk; to post real-time information about levels of lead, arsenic, and
microbes in drinking water, colour-coding health concerns for children, the
elderly, or people suffering from particular health problems; to arm job
hunters with comparisons of hazards at particular workplaces; to allow
shoppers quickly to compare the safety and reliability of children’s toys, as
well as their prices; to allow people shopping online to choose to consider
only items that meet specified health, safety or environmental criteria; or
with groceries to link through familiar barcodes information about benefits
of new disease-fighting foods with an individual customer’s medical
profile, displaying results on android devices.93 In short, the Internet offers
the potential for today’s piecemeal disclosure requirements aimed at
reducing risks to grow into a great web of reliable consumer information.94
6.3.
These positive points provide interesting food for thought. But we must not
overlook the shortcomings of the Internet, most obviously the danger it
presents of information overload. In some areas already – including,
increasingly, in financial markets – information is increasingly available
from a variety of sources of questionable reliability at an astonishing speed,
much of it through the Internet.95 As one commentator sagely notes,
improved access to information may simply give people “the chance to be
foolish faster”.96 The Internet may also lead lay persons to rely less on
professional advice and to rely instead on raw or untested online data, or to
follow investment trends blindly because they are incapable of making
reasoned decisions in an increasingly complex environment.97 These risks
should be considered in designing and implementing a disclosure system.
92
93
94
95
96
97
Graham, at 11.
Graham, at 12.
Graham, at 12.
Dalley, at 1105.
Dalley, at 1105.
Dalley, at 1106.
18
7.
SOME TAKE HOME POINTS
7.1.
Every disclosure system must have an articulated purpose, an identified
mechanism through which it can accomplish that purpose, a design that
takes into account the operation of that mechanism, and a careful analysis
showing that the benefits of the system outweigh its costs.98 As with any
other regulatory measure, information-based disclosure systems also need
to be designed for improvement over time.99 Built-in analysis and feedback
requirements can reduce the effects of initial shortcomings, as well as
discovery and exploitation by regulatees of loopholes in disclosure rules.100
Such requirements can also keep disclosure systems up-to-date as science
and technology, markets, and political priorities evolve.101 Finally, it is
important
that
disclosure-based
obligations
are
enforced.102
The
enforcement scheme, like the disclosure system, should be designed in
accordance with the goals of the system and with its operation in mind.103
Matthew Smith
Barrister
Thorndon Chambers
98
99
100
101
102
103
Refer for instance to Dalley, at 1131; Orbach, at 757.
Weil et al, at 176. Also note Weil, at 14 (“Improvement in sustainability of a disclosure-based system can be
measured [over time] by three metrics: 1. Increase in use of information provided by the system; 2. Increase in
the accuracy or quality of information provided by the system; 3. Increase in the scope of information provided
by the system”).
Weil et al, at 176.
Weil et al, at 176; Graham, at 22.
Dalley, at 1129.
Dalley, at 1129.
19
APPENDIX: STATUTORY INFORMATION DISCLOSURE REGIMES
Statute
Summary of statutory disclosure provisions
1.
Airport Authorities Act 1966
Section 9A provides for the making of regulations requiring disclosure of information by airport
companies. By section 9D a summary offence is committed if anyone fails, without reasonable excuse, to
comply with information disclosure requirements prescribed in the regulations.
2.
Apple and Pear Industry Restructuring Act 1999
Section 25 allows for regulations to be made requiring ENZA to disclose its financial statements and to
publish information including in relation to its prices, terms, and conditions, pricing policies and
methodologies, costs, cost allocation policies and methodologies, and performance measures.
3.
Civil Aviation Act 1990
Section 99A provides for the making of regulations requiring the holders of aviation documents relating to
an air traffic service to publish information in relation to the provision of that service, including
information on prices, terms, and conditions. By section 99C, a summary offence is committed if anyone
fails, without reasonable excuse, to comply with information disclosure requirements prescribed in the
regulations.
4.
Commerce Act 1986
Part 4, subpart 4 sets out an information disclosure regime the purpose of which is to ensure that sufficient
information is readily available to interested persons to assess whether the purpose of Part 4 of the
Commerce Act is being met. The disclosure of information, and the CommComm’s summary and analysis
of that information, provide the means by which the purpose of information disclosure is to be achieved.
The CommComm also has the power to apply to the High Court for an order requiring information
disclosure requirement to be complied with (s 86A), and any contravention of information disclosure
requirements may attract pecuniary penalties (s 86), or be the subject of a summary prosecution (s 86B).
19
Statute
Summary of statutory disclosure provisions
5.
Dairy Industry Restructuring Act 2001
Section 65 allows for regulations to be made requiring disclosure of information by the Livestock
Improvement Corporation Limited which may include information on pricing methodology. By s 67
summary offences are committed if anyone fails, without reasonable excuse, to comply with any
information disclosure requirements prescribed in regulations, or if anyone makes a false declaration
when supplying any information.
6.
Fisheries Act 1996
Section 296ZA allows for regulations requiring approved service delivery organisations to make publicly
available prescribed financial statements and to publish information on matters including prices, terms,
and conditions of supply, pricing policies and methodologies, costs, and cost allocation policies and
methodologies. Section 296ZC further allows the Minister of Fisheries to request by notice in writing that
approved service delivery organisations supply to him specified information, data, and forecasts relating
to the business, operation, or management of the organization. Failure to supply information, or the supply
of false or misleading information, constitutes offences under s 252.
7.
Gambling Act 2003
Sections 107-108 require class 4 operators to publish annual reports including an itemised statement of the
application or distribution of net proceeds from class 4 gambling.
8.
Gas Act 1992
Section 55 allows for regulations to be made requiring gas wholesalers, pipeline owners, and gas retailers
to disclose specified information. By s 57 summary offences are committed if anyone fails, without
reasonable excuse, to comply with any information disclosure requirements prescribed in the regulations,
or if anyone makes a false declaration when supplying any information.
9.
Kiwifruit Industry Restructuring Act 1999
Section 26 allows for regulations to be made requiring Zespri Group to make its financial statements
publicly available and to publish information including in relation to its prices, terms, and conditions,
pricing policies and methodologies, costs, and cost allocation policies and methodologies.
20
Statute
Summary of statutory disclosure provisions
10.
Postal Services Act 1998
Sections 60 and 61 allow for regulations to be made requiring NZ Post to disclose its financial statements
and to publish information in relation to the services it provides, including information relating to prices,
frequency, quantity, and quality of services. By s 56 summary offences are committed if anyone fails,
without reasonable excuse, to comply with any information disclosure requirements prescribed in the
regulations, or if anyone makes a false declaration when supplying any information.
11.
Sale and Supply of Alcohol Act 2012
Sections 334 and 383 require licensing trusts and community trusts, respectively, to publish audited
financial statements on an annual basis. A failure to comply with this requirement constitutes a criminal
offence.
12.
Sale of Liquor Act 1989
Section 219X requires community trusts to publish audited financial statements on an annual basis, which
are to include a statement of financial position and income and expenditure account and notes to them,
giving a true and fair view of the financial affairs of the community trust for the financial year.
13.
Telecommunications Act 2001
Sections 69ZC and 69ZD and ss 156AU and 156AV allow the CommComm to require access providers
and local fibre companies, respectively, to prepare and disclose information about the operation and
behaviour of specified parts of their business, including information on contracts, prices, terms, and
conditions of supply, transactions with related parties, plans and forecasts, and network capacity
information. By s 156A offences are committed if anyone fails, without reasonable excuse, to comply
with any information disclosure requirements prescribed in the regulations, or if anyone makes knowingly
provides false or misleading information. Further penalties may be imposed in the case of any continuing
breaches of regulatory disclosure requirements (s 156M).
21