FMA shifts toward enforcement, prompting closer scrutiny of wholesale investor practices
Sponsorship note: This article was provided by K3 Legal
Following the FMA’s decision to escalate concerns to the High Court, it's only a matter of time following a judgment before we see an announcement that “the law was clear all along.” Next, we predict FMA will start knocking on the door of finance companies relying on the wholesale exemptions to convey their dissatisfaction through launching enforcement action. While they’re at it, they might well check on their other bugbears like fair dealing too.
This means anyone relying on wholesale exemptions must stop telling themselves comforting stories like “everyone else does it this way” or “we’ve got a certificate, so we’re fine.”
The FMA’s summary table it submitted to the High Court is below, identifying its major differences in opinion it has with offerors. Below the table, we identify further implications of the FMA’s position which they might allege were “obvious.”
Question |
FMA’s Position |
Broad Contrary Position Adopted by Offerors |
(a) To be valid, does an eligible investor certificate in relation to an offer of financial products need to expressly describe: (i) the previous experience that A has in acquiring or disposing of financial products; and (ii) the aspects of A’s experience in acquiring or disposing of financial products which they consider would enable them to assess the matters required by cl 41(2)(a)–(c) for the transaction to which it relates? |
Both (i) and (ii) are required. |
Neither (i) nor (ii) is required. A is required only to certify they have experience in acquiring and disposing of financial products (that is, they do not need to expressly state what those financial products are). |
(b) For an offeror to rely on an eligible investor certificate, or otherwise treat an investor as an eligible investor, in respect of the transaction to which it relates, does the offeror need to be satisfied that: |
||
(i) the eligible investor certificate is valid? |
Required |
Required |
(ii) based on the grounds stated in the certificate, A could make the assessments required by cl 41(2)(a)–(c) in respect of: (A) a financial product of any kind; and (B) the financial products involved in the transaction to which the certificate relates? |
Both (A) and (B) are required |
Neither (A) nor (B) is required. Offerors claim they may rely on the confirmation provided by the accountant, lawyer, or financial advisor who confirmed the certificate without making further inquiry. |
(c) If the answer is yes to either (b)(i) or (ii), is an offeror permitted to rely on information which is not contained in the eligible investor certificate to undertake either assessment? |
Yes |
No |
(d) If an offeror makes an offer of financial products to A in circumstances where it is not permitted to rely on A’s eligible investor certificate, is disclosure required to be given to A under Part 3 of the Financial Markets Conduct Act 2013? |
Yes |
No |
If your eligible investor certificate relates to a class of investments instead of obtaining a separate investor certificate for each proposed investment, you may well have a problem. The FMA alleges under (b)(ii)(B) that the wholesale investor certificate assessment must be grounded in the particular financial products involved in the transaction. For example, say you get a wholesale investor certificate for a client for secured lending involving a low-risk borrower with an excellent LVR. An investor who has a sufficient investment background to satisfy the requirements for a certificate here might not do so for a higher risk investment opportunity where the LVR is poorer, construction is ongoing, and a heavier emphasis is placed on personal guarantees to secure the lending. This makes relying on using an eligible investor certificate for a class of investments risky at best, even if you are fully across the two-year time limit you can rely on these certificates for.
You need to be careful about the level of detail provided by investors. The FMA has previously warned that “kiwisaver,” “purchasing a house” etc. are not sufficient descriptions to understand if the investor has sufficient experience to satisfy the requirements. The more specific detail the better, even though this can be a hassle for the clients to provide. You also need to take care with how much “help” you provide investors in completing these certificates. If the FMA concludes that your instructions effectively prompted them to copy-paste justifications, it may argue they didn’t understand the consequences; and that you’ve engaged in misleading conduct by omission. As an offeror, you need to turn your mind to whether you agree with the conclusion in the certificate with what you know. It isn’t enough to say your job is done when you receive the certificate from an external professional.
Other issues might include an offeror wanting to refer their clients to independent legal, accounting, or financial advisors to provide eligible investor certificates. We all have networks, but FMA may soon be cracking down on this practice due to concerns around the independence of the advisor. This has been signalled since the FMA’s 2022 thematic review (see page 11) here. It is understandable that financial advisors offering financial products cannot certify the eligible investor certificate for investors seeking to subscribe to their own product. While we believe it is a substantial reach to claim offerors referring investors to advisors have compromised the independence of those advisors, this nonetheless appears to be the FMA’s position.
Separately, take care that any warning statements you provide are word for word identical to what the FMCA and associated regulations require. We have seen examples of the warning statements being altered or multiple documents for different sorts of investors being collated in a way that the FMA might allege that investors were confused. Don’t let this be you!
The FMA is moving from guidance to enforcement starting soon. Don’t wait for the judgment to drop to start complying with the law as it “should always have been understood.” Your next wholesale investor might be a test case, or worse, a witness.
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Helen Edwards, Director, K3 Legal
Helen leads the Private Wealth team at K3 Legal, where she specialises in creating and managing robust trusts and wills to safeguard client wealth. With 23 years of post-qualification experience in both New Zealand and London, Helen brings a wealth of knowledge and keen commercial acumen to her role. Her extensive background allows her to craft effective and practical solutions for addressing client problems.
In addition to her work in private wealth, Helen is involved in private equity investing, capital raising, and business/share acquisitions and dispositions.
Andrew Coffin, Solicitor, K3 Legal
Andrew works in the firm’s private wealth team, focusing on trusts and estates but with a particular interest regarding immigration and tax implications. He was admitted to the bar in 2020, graduating from the University of Auckland (honours, first class in both Law and Geophysics).
Andrew started his career in a large law firm, progressing quickly to work on a wide variety of legal and non legal private client matters including immigration. Andrew then worked in the financial sector, before joining K3 Legal. Andrew’s wide ranging legal and non-legal experience helps him understand legal matters from a client’s perspective and use a creative problem-solving approach.