Many observers think the 'definition' of a 'wholesale investor' has been abused, so that people who have come into some money, ordinarily qualify. On the face of it an investor with a six-figure asset can self-certify that they know what they are doing as a wholesale investor.
But as is clear to many, not only is that not the case, it allows fund raisers to target a group of people who may in fact be financially naive.
There are some high-profile cases where this seems to have been the case.
The FMA is rightly concerned. People are getting hurt. The whole sector is far too loose in its approach.
Now the FMA has applied to the High Court for some guidance on how to interpret the law.
It has issued the following note today.
The Financial Markets Authority (FMA) – Te Mana Tatai Hokohoko – has filed a case stated proceeding to seek the Court’s determination on legal issues about the use, confirmation, and acceptance, of eligible investor certificates in the wholesale investment sector.
The proceeding follows investigations into the use of eligible investor certificates by various wholesale property developers. These investigations followed the FMA’s thematic review of wholesale offers of financial products.
A case stated proceeding is a process by which the FMA can ask the Court for its opinion on a question of law. It is not an action taken against any specific party. The FMA has previously used a case stated proceeding to seek clarity from the Court in relation to CBL. This is the second time the FMA has brought a case stated proceeding.
The purpose of the proceeding is to provide clarity to the market on clause 41 of Schedule 1 of the Financial Markets Conduct Act 2013 and to ensure confident participation in wholesale markets by offerors and eligible investors.
The answers from the Court will help to ensure those investors who require the protections provided by the Financial Markets Conduct Act receive those.
Annex
The FMA is asking the court’s opinion on clause 41 of Schedule 1 of the Financial Markets Conduct Act and the following questions of law:
- To be valid, does an eligible investor certificate in relation to an offer of financial products need to expressly describe:
- the previous experience that A has in acquiring or disposing of financial products; and
- 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?
- 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:
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the eligible investor certificate is valid; and/or
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in the context of an offer of financial products, based on the grounds stated in the certificate, A could make the assessments requirement by cl 41(2)(a)–(c) in respect of:
- a financial product of any kind; and
- the financial products involved in the transaction to which the certificate relates.
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- If the answer is yes to either (2)(a) or (b), is an offeror permitted to rely on information which is not contained in the eligible investor certificate to undertake either assessment?
- 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?
Full details of the Case Stated Proceeding can be found here
3 Comments
The current definition is ridiculous - basically anyone can "self certify" that they have investing experience, or can drop $750k from the sale of a house or inheritance into an investment. Both these grounds for qualifying should be removed. That would leave investors with $5M of net assets, and those who have previously invested $1M in financial assets, as qualifying.
I know of people who met certain nameless property developers at an event spruiking their investments, who then invested their entire life savings (from the sale of their family home after downsizing into a small unit) into the property development fund without doing an ounce of due diligence, all because of a 10% promised return and the assurances of the company owner that they were honest and reputable. They wouldnt have a clue as to the risks of the investment, or even realise that their rights to protection that existed were being surrendered.
We'll see what falls out of the Du Val saga, but there are far bigger funds with far more elderly retirees invested in them than Du Val out there.
Shame on the FMA when they investigated these funds a few years ago. I would have thought, having found them all guilty of taking investments from naive and inexperienced investors, that at the bare minimum an order would have been made to force immediate repayment of those investors. Instead, all the property companies got was a letter from the FMA telling them not to do it again. Newsflash - they're still doing it.
Sure it's tragic but *shrug* investor beware.
When FHB find themselves in negative equity after buying homes off these very elderly retiree investors, they're told they should've done more diligence on the biggest purchase in their life. Yet when old people make a doozy and invest in the wrong places, the narrative is they were duped and must be compensated at once.
The "by the bootstraps" fair-weather expert generation very quickly turns into plausible deniability.
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