Paul Gregory.
by Matthew Martin
Paul Gregory.
The Financial Markets Authority (FMA) says it investigated statements made by the Auckland-based real estate development, investment and asset management group relating to its Mortgage Fund Limited Partnership (“fund”).
The FMA concluded that the advertising contravened fair dealing provisions in the Financial Markets Conduct Act because they created the impression investing in financial products connected to property development was low risk.
In fact, property development, including associated finance, is inherently risky, the FMA says.
Du Val’s statements included:
- representing the fund had “the best of both worlds”, with high security and high return and comparing it favourably to bank term deposits but without a balanced view of the risks;
- and claiming there were “no fees” associated with the Mortgage Fund, despite the company retaining any profit on projects above the return to investors. The FMA concluded Du Val receiving 100% of all profits above the 10% fixed return to investors was effectively a performance-based fee and Du Val was not transparent about this.
The statements appeared at various times on Du Val’s website and social media channels.
The FMA initially raised concerns with Du Val and the firm took some steps to amend or remove its advertising materials, however, the regulator considered its concerns were only partially addressed and continued to see Du Val marketing materials as likely to be misleading.
The direction order requires Du Val to cease publishing the specific materials in question and ensure future materials are not likely to mislead or deceive about the inherent risks of financing property development projects.
When advertising the fund, the firm must also exclude any references to term/bank deposits and other low-risk financial products relating to property development and ensure its revenue-generating and sharing methods are transparent alongside any claims about no or low fees.
The FMA's director of investment management Paul Gregory says the FMA assessed the seriousness of Du Val’s contraventions and decided a direction order was the appropriate and proportionate regulatory response.
“The direction order requires Du Val to demonstrate how it is rectifying its advertising practices. Importantly, we expect Du Val to make changes across all its financial product offers, not just the Mortgage Fund,” he says.
The FMA has not ruled out further action but the direction order is focused on addressing an existing and ongoing risk of harm to investors from advertising materials.
Du Val has 10 working days to comply with the direction order and 20 working days to confirm how it has reviewed its advertising process to ensure future compliance.
The direction order was issued under section 468 of the FMC Act, however, Du Val intends to appeal some aspects of the FMA decision.
“This case was particularly troubling because Du Val appeared to be using social media and other online channels to target less experienced investors," Gregory says.
"Firms making wholesale investment offers must comply with fair dealing provisions, and in particular, must not mislead or deceive potential investors.”
Du Val’s offers used the wholesale investor exclusion in the FMC Act that is designed for investors considered highly experienced and/or well-resourced (such as investment institutions).
Individuals typically must reach a monetary or investment experience threshold to qualify as a wholesale investor.
The FMA advises less-experienced investors to stay clear of wholesale offers or, if they believe they may be able to meet the requirements, to seek independent financial advice before investing.
Gregory says the regulator had signalled repeatedly since the start of the year that it was monitoring how the industry is using the wholesale exclusion.
Less-experienced investors have become increasingly interested in different types of offers, substantially due to low returns on fixed-term deposits and other low-risk investments with which they had previously received satisfactory returns.
The FMA is concerned some investors in this vulnerable situation are drawn to high-risk products claiming to better term deposit returns with similar low risk, as exemplified by Du Val’s advertising.
“We have become increasingly concerned about wholesale offers spreading into mainstream advertising, especially through social media, where the notion highly experienced investors are the target market becomes questionable.
"We expect entities relying on the wholesale exclusion to learn from this case and reflect on their own marketing practises,” he says.
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