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by Stephen on July 8th, 2022

At the end of last week, the High Court upheld a direction order by the Financial Markets Authority (FMA) to property developer and syndicator Du Val to remove advertisements published on social media on the basis that they were likely to mislead or deceive investors, and contravene the ‘fair dealing’ provisions in the FMC Act.

The FMA said the advertisements (for offers relying on the wholesale investor exclusion in the FMC Act) created the impression investing in financial products connected to property development was low risk when, in fact, property development, including associated finance, is inherently risky.

FMA direction to remove advertisements

The background to the action brought by Du Val was an October 2021 direction by the FMA to remove advertising materials that the FMA believed were likely to mislead or deceive investors, and thereby breach the ‘fair dealing’ provisions in Part 2 of the FMC Act.  The FMA said that Du Val’s advertising of its Mortgage Fund Limited Partnership (Mortgage Fund):

  • represented that the Mortgage Fund had “the best of both worlds”, with high security and high return and comparing it favourably to bank term deposits but without a balanced view of the risks; and
  • claimed there were “no fees” associated with the Mortgage Fund, despite Du Val retaining any profit on projects above the return to investors.

Target audience – wholesale investors

Du Val’s target audience for the Mortgage Fund were ‘wholesale investors’.  That is, Du Val was seeking to offer investment in the Mortgage Fund relying on the wholesale investor exclusion from the disclosure regime in the FMC Act.

Du Val’s adverting appeared at various times on Du Val’s website and social media channels.  The FMA initially raised concerns with Du Val, which took some steps to amend or remove the advertising material.  However, the FMA considered its concerns were only partially addressed and continued to see the advertisements as likely to be misleading.  As a result, it issued a direction order.  In doing so, the FMA also stated that it considered the direction order was appropriate because (among other things) the marketing channels used by Du Val did not target experienced investors but appear to target inexperienced investors by using social media and other online channels.

This was in keeping with signals by the FMA, since early 2021, that it was monitoring use of the wholesale investor exclusion.  This was, because of the low returns on fixed term deposits and other low-risk investments, less-experienced investors were increasingly interested in different types of offers – and the FMA was concerned that some (possibly vulnerable) investors were being drawn to high-risk products claiming to better term deposit returns with similar low risk.

Appeal against direction order

For technical reasons, the action brought by Du Val was in the form of an appeal against the FMA’s direction order – which must be confined to questions of law.  The questions of law were:

  • First, what is the correct legal test to determine whether material is likely to mislead and deceive?  In the case of a fund that is only open to wholesale or eligible investors, should it be whether an average wholesale or eligible investor is likely to be misled or deceived and is that a higher standard than an ordinary reasonable person?
  • Secondly, had the FMA applied the appropriate legal test in determining that Du Val’s promotional material has, or is likely to, mislead and deceive?
  • Thirdly, is retained profit properly characterised as a ‘fee’?

First issue – likely to mislead and deceive?

This was the first appeal (aka a test case) against a direction order by the FMA under the FMC Act.   

After an explanation of the basis for applying the test, the High Court judge found that the correct approach when determining whether Du Val’s advertising material is likely to mislead or deceive requires (as a first step) an identification of the target audience for the representations.  That is, whether it is the public at large or a particular class (subset) who is targeted and, in either case, excluding outliers.

The concern for the FMA (and the problem for Du Val) was the use of social media – which might not be the usual home/channel for reaching a non-retail audience.

Second issue – appropriate test

The fact that, ultimately, only wholesale investors could participate in the Mortgage Fund – did not prevent the Court accepting the FMA’s submissions that the ‘fair dealing’ provisions are intended to protect all investors.

This seemed to colour the Court’s thinking about identifying the standard of care that can be expected from the target audience.  Specifically, the Court did not consider the FMA erred in law by declining to accept that wholesale investors are inherently more sophisticated than non-wholesale investors and are considered to be capable of evaluating the merits of an offer or accessing necessary information.

Consequently, the inclusion of unsophisticated wholesale investors in the catchment for the advertising supported the FMA’s view that the advertising could be misleading and deceptive (and led to the Court finding that there was no error in law in the direction order).

Third issue – is retained profit a fee?

The Mortgage Fund promised investors a fixed return of 10% p.a. with Du Val, as the General Partner, retaining any profits over and above the 10% return.  This meant that it also wore any shortfall.

In the direction order the FMA found that Du Val’s “no fee” representations to be misleading and described the General Partner’s right to all profits (above the 10% return) made by the Mortgage Fund as effectively a performance-based fee.

By contrast, Du Val argued the “no fees” statement would not mislead the reasonable wholesale investor.

The Court noted that the FMA’s direction order provided for two alternative prescriptions:  either (i) omit the “no fees” representations; or (ii) include proximately to those representations a statement that “We retain any profit in excess of the 10% p.a. return to investors” or similar words.  That indicated the concern about the lack of clarity about the Du Val’s remuneration.  

The Court also noted that earlier correspondence made it evident that the FMA did not accept an analogy with bank term deposits, where no such statement is required.

From this, the Court concluded that while the FMA’s reference to a “fee” might have been inapt, this was not one of those rare cases in which there was no evidence to support the FMA’s determination or in which the only reasonable conclusion contradicts the determination.  As a result, because of the nature of the appeal (being confined to questions of law), it was not for the Court to impose its own view as to whether the representations are likely to mislead or deceive in the particular circumstances of the representations, their target audience and the investment product structure.


There are aspects of this decision that I find difficult to follow.  Particularly the Court’s apparent willingness to accept that, despite meeting the statutory criteria to be considered as wholesale investors – some investors within that group may still not be able to look after themselves. 

But, much as I dislike having a bob each way, I have some sympathy for the FMA’s approach – because direction orders are at the lower end of the FMA’s enforcement toolkit and are designed to be used in circumstances where the FMA needs to act quickly.  And, in this case, it did provide Du Val with the chance to modify its advertisements.

And, although the Court did not refer to it, the judgment aligns with the FMA’s October 2021 guidance note on the advertising of financial products where that guidance indicates that, if an offer is only available to wholesale investors, the advertising should make it “immediately and prominently clear that it is not suitable for retail investors”.

Here, both the medium used (social media) and the references to bank deposits acted like red flags.  As a result, the FMA was clearly concerned about audience spillover and an unfair use of benchmarking.

The FMA has previously signalled concerns about offers on the fringe of the wholesale market.  Amongst the takeaways from this test case, is a clear steer towards taking greater care about targeting a channel that is appropriate to the audience for the investment. 

Unfortunately, as a test case, the technical constraints of being confined to issues of law only mean that what I think was a muddily handling of the distinctions between a wholesale and retain audience may not be explored more fully.

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