Formal Warnings issued by the FMA for Non-Compliant Practices

17 January 2023

Following a review of wholesale investments into property related offers, the Financial Markets Authority (FMA) has issued formal warnings to seven property investment firms for alleged non-compliant practices.

The review came as a result of an increase in complaints to the FMA concerning how the wholesale offers were being promoted and whether property investment firms were targeting and accepting appropriate investors.

The FMA announced that their most significant findings related to the use, confirmation, and acceptance of eligible investor certificates (Certificates). Such Certificates are required to be confirmed either by financial advisors, accountants or lawyers but the FMA’s investigation found that, in some cases, Certificates had not been confirmed by the required professional.

Also, to comply with the requirements for these Certificates, certain grounds need to be met to establish why the person is an “eligible investor.” These grounds are to show that the person investing has previous experience in acquiring or disposing of financial products which allows that person to assess:

  • the merits of the investment (including assessing its value and the risk involved);
  • the potential investor's own information needs in relation to the services; and
  • the adequacy of the information provided by any person involved in the investment being offered.

The FMA found that Certificates were being confirmed and accepted by the property investment firms with no grounds or with grounds that did not relate to the matters certified.

Grounds considered insufficient include statements such as owning a term deposit or KiwiSaver, having a rental property portfolio, making substantial profits from selling houses, the sale of a farm and “experience in investment.”

There are also several practices in the market which the FMA believe may increase the risk that investors may be misled. These practices include:

  • advertising through social media channels, rather than targeting experienced investors;
  • promotional material which promotes high returns with low risk or no risk;
  • offerors using digital advertising strategies, such as search optimisation, that may target non-expert investors (for example, promotions for wholesale property development projects targeting advertising at people using search terms such as “Sharesies” and “term deposit”);
  • promotional materials that were not clear the offer was only available to wholesale investors; and
  • some instances of aggressive or “hard-sell” techniques, although this did not appear to extend to investors being pressured to self-certify as eligible investors.

Why it matters?

The purpose behind the wholesale investor exclusion is so investment offers can be made to certain expert investors without the investment offeror having to prepare a disclosure statement. The disclosure statement provides an in-depth analysis about the financial products being offered and comes at a significant cost to the investment offeror but it is designed to protect “non-expert investors.”

The FMA is concerned that some investors are confirming that they are eligible investors when they don’t have the grounds to qualify as such. The FMA are concerned by some offerors encouraging this behaviour as well as the behaviour of accountants, lawyers and financial advisers confirming the eligible investor certificates - which increases the chance investors will invest without adequately understanding the risks involved and the value offered by the investment.

The FMA will be making referrals to the relevant professional bodies for lawyers, accountants and financial advisers who confirmed the deficient eligible investor certificates and urge all investors to carefully consider their ability to understand and assess the risk of investments and to seek independent and professional advice before signing eligible investor certificates.

Norris Ward McKinnon deal regularly with advising both issuers on their statutory obligations, as well as investors with regards their investment decisions. We welcome the opportunity to discuss these matters with you.

Click here to read the FMA press release

Chris Steenstra and Tom Corkill are part of our Corporate & Commercial team at Norris Ward McKinnon.