The Commerce Commission is advising the finance sector to take note of the lessons to be learned from its investigation into the marketing and sale of the failed investment product Credit SaILS. The following are its tips.
It has released the following tips as part of its "Investigation Closure Report" into Credit SaILS.
Instead of prosecuting the companies involved the commission settled with them. The five companies agreeed to a $60 million settlement which means investors in Credit SaILS have the opportunity of getting around 85% of their capital back.
The five companies involved are; Forsyth Barr, Forsyth Barr Group, Credit Agricole Corporate and Investment Bank, Credit Sail Limited and Calyon Hong Kong Limited.
“This investigation has some important lessons for the industry. There are actions the industry can take to ensure they don’t mislead investors,” Commission chairman Mark Berry says.
The Commission offers the following guidance, in line with the Financial Market Authority’s guidance, to those involved in the marketing and sale of financial products.
All information conveyed to investors must be accurate. This applies to information in a prospectus, offer documents, marketing materials and things said verbally by financial advisers.
All key terms must be disclosed up-front. Anything significant about the offer – its upside, downside, costs, term etc – needs to be highlighted early on.
It is possible to mislead by silence. What you leave out or obscure can mislead, as well as what you choose to say. Ensure that all relevant information is provided.
Give prominence to representations that investors will care about. In the Credit SaILS case, we thought that there was a disproportionate and misleading prominence given to the potential benefits of an investment in Credit SaILS. The risks were found on pg 42 of the offer; we say that is so unbalanced and lacking in prominence as to be misleading.
Claims of capital protection and capital guarantee should be avoided unless they are perfectly true. Investors in this case thought that ‘capital protection’ meant that the capital was guaranteed against loss. This is what ‘protection’ means to the average non-expert investor.
Use plain English, not technical jargon. Investors will take different meanings from the language than financial institutions and brokers. For example, investors in Credit SaILS understood the phrase “Capital protected by AA Rated collateral” to mean that their capital was effectively guaranteed against loss.
Financial advisors are a critical source of information for investors. Whatever the documents say, advisors can mislead investors by what they say. Where products are new or highly complex, promoters must ensure that all intermediaries who sell the product are given genuine grounding in the products and thorough information. Otherwise selling agents can be put in a position where they mislead investors.
Sellers of investment products should ensure that investments are suitable for the investors to whom they are offered. Complex and difficult to understand products should not be targeted at unsophisticated retail investors. Marketing and sales should be tailored to appropriate buyers and buyers given accurate information in an even-handed way.
Investments made on behalf of others must be consistent with the risk appetite of the investor. Where financial advisers are in the position to make investments on behalf of others, they must be absolutely confident that they are investing consistently with the express risk profile of the customer. This necessarily means being fully familiar with what they are selling and all its attendant risks.
Creators and promoters of investment products may have liability even where they are not named as an ‘issuer’ or ‘promoter’. Liability is determined by the substance of what companies do and say, not by their roles as they choose to designate them.
FMA has published Effective Disclosure Guidance to help issuers and promoters of investment products to ensure that they give investors meaningful and easy-to-read information about the risks, rewards, and costs of investments
The Commission might well have added the words of Anthony Molloy, QC, on page 14 of his submission to Parliament’s commerce select committee on December 15, 2010: “Meaningful consideration of investor protection legislation is impossible without first identifying the culture of the New Zealand market that has treated investors as prey.”
This, of course, followed on the heels the ANZ/ING frozen funds case, in which “asset-backed” collateralized debt obligations (CDOs)were presented as being little riskier than term deposits when the truth was that nobody, least of all those self-proclaimed experts at ANZ and ING, had a clue how CDOs worked—and didn’t work.
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This, of course, followed on the heels the ANZ/ING frozen funds case, in which “asset-backed” collateralized debt obligations (CDOs)were presented as being little riskier than term deposits when the truth was that nobody, least of all those self-proclaimed experts at ANZ and ING, had a clue how CDOs worked—and didn’t work.