The property investment ‘loophole’

Thursday, April 7th 2011, 7:30PM 1 Comment

by FMA

An article published about a ‘loophole’ in regards to property investment advisers has raised some concerns and questions. It might be helpful if I clarify a few points: Cabinet signalled in November of last year that "Blue Chip- type schemes" should be included within the Financial Advisers regime.  This has been reflected in the recently promulgated regulations defining ‘land investment product’ and brings such products firmly within the financial advisers’ regime as category 1 products. This is an important step to regulate a previously unregulated product as most blue chip type schemes fall outside of the Securities Act. As many of you will be aware, the Financial Advisers Act does not apply to some occupations, where they are providing financial services in the ordinary course of that business. This exemption applies to real estate agents who would have been subject to dual regulation had they been included.  We expect a professional approach to determining what constitutes the ordinary course of business for real estate agents. This will vary from agent to agent and therefore in the new world of regulated financial advice, real estate agents need to ask themselves whether their services in each case could sensibly be seen as part of a real estate agent's job or not. A true professional in any field always puts their clients’ interests ahead of their own.  Therefore a real estate agent, a professional, would also ask themselves whether they have the competence to be able to provide the advice, which might include the ability to conduct a proper suitability analysis for their client. If the answer is no (as we'd often expect it to be in the case of complex property investment schemes) the agent should recommend that their client sees an AFA. It is worth noting a couple of other relevant legislative developments, such as a new power, proposed in the Financial Markets Authority legislation, to make regulations disapplying exemptions under the Securities Act in relation to certain products.  Recent Cabinet decisions on the broader securities law review also propose to allow the FMA to designate a financial product or service as being subject to securities law.  There will also be an opportunity to review how securities law deals with real estate investment later in the year when the Securities Law Bill is introduced. Overall we think the position in relation to advice on complex property investment has come a long way since Blue Chip. We now have these kinds of investment schemes clearly defined and within the scope of the Financial Advisers Act.  We will have some new powers under the FMA legislation to deal with product issues when they arise, and there will also be opportunities to discuss what further regulation is needed for property investment under new Securities Act laws.
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Comments from our readers

On 8 April 2011 at 10:52 am Paul Brownsey said:
It would be interesting for you to take a look at some of the gold investment schemes being heavily advertised to investors in New Zealand without a prospectus. While Gold itself is a legitimate investment option, some of these investment schemes are geared, carry extremely high fees, have poor liquidity, are completely opaque with respect to any credit risk to the intermediary - and none of this is disclosed adequately to potential investors, nor is there any requirement to produce a prospectus.

Much of the advertising I have seen stresses gold as "part of your investment portfolio" or "an alternative to traditional investments" and is directly targeting retail investors yet purveyors of gold investments are regulated significantly more lightly than any other Financial Advisor or investment promoter.
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