Seven property investment firms issued with warnings by FMA

The country's investment watchdog has issued formal warnings to seven companies involved in soliciting funds for property investment after it found "a number of undesirable practices" in the market for wholesale offers.

The Financial Markets Authority (FMA) said a review it has just completed found several conduct concerns in the wholesale property investment sector, and issued seven formal warnings.

As part of its review, the FMA required information from 23 entities across the industry, including advertising, offer documents and process documentation.

As a result, seven warnings have been issued by the FMA to offerors using non-compliant eligible investor certificates. These were: Black Robin Equity Limited and Westwood Terraces BRE Limited; Du Val Capital Partners Limited and Du Val BTR GP Limited; E+O Property Syndication Limited; Jasper NZ Investments Limited; Provincia Property Fund Limited; Williams Corporation Capital Partnership GP Limited; and Wolfbrook Capital Limited.

Generally, wholesale investment involves offerings where there's no product disclosure statement (PDS) made and these offerings are made to expert, usually high worth investors.

The FMA said it had instigated the review of wholesale investments into property-related offers after noting "an increase in complaints made and concerns raised about how such wholesale offers were being promoted, and whether the appropriate investors were being targeted and accepted."

The Financial Markets Conduct Act 2013 (FMC Act) prescribes how offers of financial products can be made to potential investors, subject to a number of exclusions. One of these exclusions is for offers made to wholesale investors. Offers to wholesale investors do not require the standard disclosure, governance and financial reporting requirements that apply to regulated offers, on the basis that wholesale investors have sufficient knowledge and experience dealing in financial products to acquire the information they need to enable them to assess the merits of an offer, including the value and risks.

The FMA said its most significant findings related to the use, confirmation, and acceptance, of 'eligible investor certificates'.

The eligible investor certification involves investors certifying they have sufficient investment experience to assess the merits of a particular transaction, including value and risk. The Financial Markets Conduct Act 2013 requires the certificate to state the grounds for the certification. The FMA considers this requires the stated grounds to relate to the matters certified. Where the stated grounds are not relevant to the certification, the FMA considers the certificate is invalid.

The FMA said it found some certificates were not confirmed by financial advisers, accountants or lawyers (as is required), while other certificates were confirmed - and accepted by offerors - with no grounds or the grounds did not relate to the matters certified. Insufficient grounds included the sale of a farm, owning a term deposit or KiwiSaver, having a rental property portfolio, making substantial profits from selling houses, and “experience in investment.”

The FMA said it found "a number of undesirable practices" in the market for wholesale offers, including:

• offers promoted through a broad range of advertising channels, rather than focusing directly on suitable investors;

• offerors using digital advertising strategies, for example Google AdWords, that may target people for whom the offer is not suitable;

• promotional materials advertising high fixed returns and downplaying risk;

• promotional materials that were not clear the offer was only available to wholesale investors;

• incomplete eligible investor certificates including some with grounds that were not capable of supporting the matters certified;

• evidence of non-compliance with requirements relating to confirmation of self-certification for eligible investor certificates;

• 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.

The FMA's Acting Director of Capital Markets, Paul Gregory, said the wholesale investor exclusion was intended to allow offerors to make offers to expert investors without having to provide the disclosure designed to inform and protect non-expert investors.

"However, our review has found practices in the market which have allowed this exclusion to extend to people with little or no investment experience, some citing KiwiSaver or term deposits as grounds for supporting their expertise.

"The FMA is highly concerned with the conduct of some offerors and the lawyers, accountants and financial advisers confirming eligible investor certificates."

Gregory said the FMA had set clear expectations for the industry, including when an eligible investor certificate is complete and can be relied on.

“The industry should consider how our findings, and the warnings arising from them, could help improve how they promote offers and target and accept investors. The FMA will continue to scrutinise the wholesale property investment sector, especially given the volatile market environment affected by rising interest rates and falling property prices."

He urged all investors to carefully consider their ability to understand and assess the risk of investments they are offered, or seek independent and professional advice, before signing an eligible investor certificate.

"Potential investors should be asking themselves, ‘Is 8%, 10% or even 15% a good return relative to the risk of the investment, and am I in a position to be able to properly assess that risk?’ And if that seems tough, perhaps the potential investor should get expert help or reconsider whether the investment is appropriate for them."

The FMC Act provides for civil and criminal liability on a person who incites, counsels, or procures an investor to give an eligible investor certificate that the person knows to be false or misleading in a material particular.

The FMA said it had found aggressive or “hard-sell” techniques were used to sell financial products. Some undesirable practices and incentives were noted across advertising and sales functions, including advertising that emphasised it was easy to self-certify as an eligible investor. However, the FMA did not find evidence of hard-sell techniques being used to pressure investors to self-certify as eligible investors.

"If we become aware of evidence of such conduct, we are highly likely to take enforcement action," the FMA said.

A variety of penalties are available, including five year prison terms for individuals and fines up to $2.5 million.