Wholesale fund managers aren’t toddlers but the FMA seems to treat them like they are

Sonnie Bailey

28 October 2022

TL;DR: what’s the point of having consumer protection laws if they’re not going to be enforced?

Last week the FMA announced that it had sent “formal warnings” to seven property investment firms who issue investments to wholesale investors.

At the same time, the FMA also published a “thematic review of [the] use of the wholesale investors exclusion” which discussed some of its findings from reviewing these seven firms (plus another 16 the FMA sought information from).

As background, most investment offers need to meet specific disclosure, governance, and financial reporting requirements. The purpose of these requirements is consumer protection. Some investment offers don’t need to satisfy these requirements on the basis that they are only offered to “wholesale investors”. This is on the basis that wholesale investors are likely to have the experience and knowledge to assess the offer and don’t need the same level of consumer protections. If an investment firm is trying to circumnavigate protections for people who need them, then I believe this is especially egregious.

There are several ways to satisfy the definition of a “wholesale investor”. One way is by being an “eligible investor”. To qualify as an eligible investor, they need to certify that they have relevant experience in relation to financial products which enables them to assess the offer. This self-certification must then be signed off by a financial adviser, accountant, or lawyer.

As a financial adviser, I’ve been asked to sign off on confirmations of this nature. To date, I’ve never done so. Invariably, I’m not confident that the person has the relevant experience. Quite often, it’s clear because someone who meets this criteria wouldn’t be considering the investment in question.

The FMA’s thematic review included examples of misconduct:

  • Advertisements of high fixed returns that downplay risk, along with promotional material containing information and omissions that “could” be misleading, deceptive or confusing. (My view: if you took a lot of these materials to a court, they would be found to BE misleading, deceptive or confusing, in breach of the fair dealing provisions in Part 2 of the Financial Markets Conduct Act. Also noteworthy: the FMA had publicised similar concerns on multiple occasions, so these firms were already on notice.)
  • Eligible investor certificates being accepted by these firms where “no grounds for the certification were stated at all”, or the grounds didn’t refer to financial products at all (as required by law), or where the grounds referenced financial products that were dissimilar to the products they were offering.
  • The FMA mentioned some offerers providing “investors with pro-forma certificates, where relevant grounds could be selected from a ‘tick-box’ list of pre-populated financial products. In most instances, these lists included financial products different to the financial products being offered, most importantly in terms of risk (for example, KiwiSaver)”. The FMA noted that “We are concerned some offerrors are endeavouring to create what appear to be sufficient grounds to support certification, when no grounds exist.”
  • “Evidence of one offeror supplying a preferred professional adviser for investors to have their eligible investor certificates confirmed”.
  • “Multiple instances of professional advisers confirming certifications where no grounds were stated in the eligible investor certificate”.
  • Advertising on Google for search terms such as “personal term deposit rates” and “sharesies nz”. (Remember, these are products that retail clients can’t access.)

What did the FMA do?

It issued formal warnings to seven firms.

It released a report that includes statements like “Having set out expectations, we now expect a higher level of compliance in this space”.

Issuing warnings is the sort of thing you do to a toddler. These investment firms are managed by professionals, and there are real stakes at play. There are large sums of money involved. These firms are investing money on behalf of other Kiwis.

 The FMA shouldn’t treat them like toddlers. The FMA should treat them like grown-ups.

I wrote about this in 2018, after the the interim report of Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was published. One telling excerpt from this report was the following:

“Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?”

Something that was missed in a lot of public reporting surrounding the Royal Commission was that ASIC – the Australian equivalent of the FMA – was lambasted for its reluctance to enforce matters by litigation.

When a new law is introduced, there is a lot of consultation that usually takes place. I try to get involved when I can, either in my personal capacity or in conjunction with other organisations. If the regulator isn’t going to enforce the laws, what is the point? We just end up in another cycle where something really bad happens, and legislative changes are said to be needed, when the real issue was that the laws weren’t enforced in the first place (and the new laws probably won’t be, unless we put the regulator’s feet to the fire at some point).

Some excerpts from the final report of the Royal Commission:

  • “Parliament, not the regulators, sets the law and the consequences. There are cases where there is good public reason not to seek those consequences. Prosecution policies have always recognised that there may be good public reasons not to pursue a particular case. But the starting point for consideration is, and must always be, that the law is to be obeyed and enforced. The rule of law requires no less. And, adequate deterrence of misconduct depends upon visible public denunciation and punishment.
  • “If [the regulator] has a reasonable prospect of proving contravention of the law, the starting point for its consideration of what to do must be that the consequences of contravention should be determined by a court.

The interim report put it more bluntly:

  • “The law sets the bounds of permissible behaviour. If competitive pressures are absent, if there is little or no threat of enterprise failure, and if banks can and do mitigate the consequences of customers failing to meet obligations, only the regulator can mark and enforce those bounds. But [the regulator has not] done that in a way that has prevented the conduct described in this report.”
  • “When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach.”
  • “In some cases, there may be real and lively debate between [the regulator] and an entity about the breadth and operation of the applicable provisions. But if there is, it may be all the more important to commence litigation than attempt to settle it. Only the courts can give binding interpretations of applicable law and, if there is doubt about the reach of particular provisions, it will often be better that the doubt is resolved once for all than allowed to linger. Resolution of the doubt will guide future conduct by all regulated entities.
  • “I do not accept that the appropriate response to the problem of allocating scarce resources is for a regulator to avoid compulsory enforcement action and instead attempt to settle all delinquencies by agreement.”

In my previous article I concluded:

“I think the FMA should be [much more actively litigating breaches of the financial services laws]. What’s the point of having laws if they’re not enforced?

Some of the conduct that the FMA mentioned was, to my mind, egregious. If you want to deter this sort of conduct, you don’t do it with warnings. You do it with actual consequences. And if the law doesn’t allow for appropriate steps to be taken to punish and deter, then this should be made clear and the onus should be put on the Government to fix this issue by appropriate laws.


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