Offers to a wholesale audience – FMA Thematic Review

Last week the followed up its workstream from earlier in the year by issuing a report on a ‘Thematic Review’ of the wholesale investor exclusion.  It is clear that the FMA has followed up its earlier actions by undertaking a more detailed review of the activities of a number of property syndicators targeting wholesale investors.  This included inspecting the investor certificates obtained.

The outcome is a report that includes guidance for offerors relying on the wholesale investor exclusion under the FMC Act – as well as those confirming investor certificates.

Advertising

In keeping with the warnings issued earlier this year, the FMA has identified a number of concerns relating to the advertising of wholesale offers, including:

Advertising by means of a smorgasbord of advertising channels – rather than a narrow focus (directly) to suitable investors	Whilst some of the FMA’s concerns about straying from straying from previous channels that were better targeted – it seems unlikely that they are clutching at pearls or seeking to police the path to market.  Instead, a closer look at their comments and some of the examples highlights some unhealthy bait advertising that is both likely to draw in a retail investor audience and amplify the risk of some inexperienced investors being misled.
The use of digital advertising tools (e.g. Google AdWords and search engine optimisation) that may capture people who are not necessarily wholesale investors (and for whom such offers are not suitable)	Again, some of the examples highlight the risk of capturing both a retail audience and of conveying misleading information.
Misleading advertising featuring high returns and downplaying risk	The FMA notes (i) the overall impression must not be misleading or deceptive; (ii) any qualifications to headlines must be proximate, prominent, and effective so as not to be misleading or deceptive; (iii) comparisons must not be misleading (e.g. comparing a managed fund with a bank term deposit); and (iv) must not lead investors to draw comparisons between dissimilar financial products – especially if this appears to be intentional

Description of the wholesale investor exclusion

The FMA is concerned that promotional materials did not always make it clear that the offer was only available to wholesale investors – which could be misleading and deceptive (and a form of bait advertising). 

Also of concern was a lack of clarity about offers said to be available to “wholesale and eligible investors” (and the plain meaning of the words “eligible investor”) which may give the impression that an offer is available to someone other than a wholesale investor – which is also misleading. 

As a result, offerors are guided to ensuring that all advertising of a wholesale offer clearly states that it is open to wholesale investors only – using that statement with sufficient prominence to bring it to the attention of the audience.  (It is also recommended that the term “eligible investor” not be used alongside “wholesale investor”.

Eligible investor certificates

The FMA highlights a number of examples incomplete or inadequate eligible investor certificates, including a range of irrelevant and vague grounds that were not capable of supporting the matters certified.

Importantly, the FMA notes that the offeror does not need to verify the information in the certificate, but it says that the grounds stated by the investor in their certificate should:

“demonstrate a connection between the investor’s prior relevant experience in acquiring or disposing of financial products, and the transaction to which the certificate relates”

Consequently, it says that where the stated grounds are not relevant to the certification, the certificate will not meet the legislative requirements (i.e. those in Schedule 1 of the FMC Act).

The FMA then refer to certificates that use ‘tick-box’ options for investors to select from a list of pre-populated grounds for certification that refer only to prior investment activity.  It states that, without further detail, it is not clear that the prior experience enables the investor to assess the merits of the relevant transaction.  As a result, it says that further information will be required before the certificate can be relied upon.  The FMA prefers free-form text boxes so that investors can articulate the grounds for certification themselves – which it regards as clear evidence for the investor understanding the financial products they are about to acquire.

Here, the FMA’s concern is that some offerors are endeavouring to create the appearance of sufficient grounds to support certification, when no grounds exist.  And the check-box approach provides an increased chance investors will invest without adequately understanding the risks involved and the value offered.

Provision of advice and confirming self-certification

The FMA noted multiple examples of unacceptable practices by professional advisers confirming eligible investor certificates.

It noted that financial advisers, qualified statutory accountants or lawyers who confirm eligible investor certificates must:

• consider the grounds for an investor qualifying for the certification set out in the certificate;
• be satisfied that the investor has been sufficiently advised of the consequences of certification; and
• have no reason to believe the certification is incorrect or that further information or investigation is required as to whether or not the certification is correct.

It notes that where a professional adviser fails to meet these requirements, they may breach their duties and obligations under the rules of professional conduct that govern them – which could cause the FMA to consider referring this conduct to the relevant professional body.

The FMA says that its previous views that the offeror need not independently verify the information in the certificate has not changed – but that its new guidance supplements those previous views by describing what the offeror does need to do.

Observations

Whilst the FMA has set some clear expectations in relation to reliance on the wholesale investor exclusion and some of what was said makes for quite sobering reading (especially for professional advisers confirming certificates) there remain some lingering questions.

I think the FMA was right to focus on the activities of property syndicators if only because Kiwis love affair with real estate seems to lead to trouble.  As a result, I am less convinced that the findings are necessarily applicable to all wholesale offers – simply because of some entrenched behaviours.  Nonetheless, that may be more good luck than good management. 

And whilst the FMA says that it has [now] set its expectations, and expects a higher level of compliance – including by acting in ways that are properly focused on the outcome that, where the eligible investor certificate is used, only investors with sufficient knowledge and experience in dealing in financial products are accepted into the offer, there is a distinct risk that the manner I which they have portrayed some of their examples will prove to be incorrect (as a technical legal matter).  And I have some policy concerns too.

Clearly, the wholesale investor / eligible investor pathway (and self-certification) was enacted to provide easier and lower cost access to capital from investors who are capable of looking after themselves.  And by allowing self-certification and imposing only a negative assurance (that a certificate cannot be relied on where the offeror has actual knowledge that the certificate is untrue) – is not the same as requiring the offeror to vet the grounds given in certificates.

Regardless of the merits of the FMA’s concerns about the actions of sampled, there is no other way to read the guidance that an offeror should, when relying on a certificate, ensure that the grounds stated are relevant and support the certification of previous experience in acquiring or disposing of financial products that is relevant to an assessment of the financial products on offer – than as imposing a requirement for positive vetting of each certificate.  That obligation does not exist in the FMC Act and, arguably, would defeat the policy objective of the self-certification regime.

Where the FMA is on solid ground is where it says that whilst extensive and broad investment experience over a long period will be relevant grounds for the certification, so too will be other limited but specific experience in some cases.  But that self-certifiers should include sufficient detail to identify the relevance of investment activity to the matters certified.  This is key to a process of educating investors as much as offerors. 

But it should take some care not to visit problems in one, high-risk, sector on the broad spectrum of wholesale investment activity.  And here, the Productivity Commission and others with skin in the game might care to point out that the last thing that high growth businesses seeking leverage and develop innovative new technologies need right now are barriers to capital that should not exist (and do not exist).

For more information about offers to a wholesale audience – please contact me.