Wholesale certificate rubber-stampers have been put on notice after a regulatory crackdown on unlicensed property funds uncovered widespread abuse of the ‘eligible investor’ loophole.
The Financial Markets Authority (FMA) wholesale property fund ‘thematic review’ identified numerous failings in the eligible investor system including shoddy practices among professionals used to endorse self-certified clients.
Investors are able to by-pass retail protections by outing themselves as wholesale clients as long as an accountant, lawyer or financial adviser confirms the status in writing.
However, the FMA review of 23 wholesale property firms found “multiple instances of professional advisers confirming certifications where no grounds were stated in the eligible investor certificate”.
The regulator pulled “a sample of certificates from the 23 firms” caught in the probe, a FMA spokesperson said, with an unspecified number of professionals slated for referral to respective industry bodies for further attention.
“We are still in the process of making the referrals and won’t comment on how many we may make,” the spokesperson said. “It will be up to the professional bodies to determine how to deal with these referrals.”
Anyone shown to have endorsed a eligible investor certificate “knowing that it is false or misleading in a material particular” faces a fine of up to $50,000, according to the Financial Markets Conduct Act (FMC).
The FMA also found broad evidence of fund managers accepting self-certified investors on the basis of flimsy, or no, proof of appropriate skills or experience.
“We are concerned investors who would not otherwise qualify as wholesale investors are self-certifying as eligible investors when there are no grounds for them to do so,” the FMA review says. “Where this self-certification is encouraged by the offeror, there is an increased chance investors will invest without adequately understanding the risks involved and the value offered.”
The report says one manager used a “preferred professional adviser” to sign-off on eligible investors forms in a move that voided all such certificates.
Preferred advisers would be classed as ‘associated persons’ under the FMC law and prohibited from approving eligible investors on behalf of related parties.
Paul Gregory, FMA capital markets acting director, said the investigation found professionals had approved eligible investor certificates for “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.
And in a first for a FMA thematic review, the wholesale property fund report came alongside formal warnings issued to seven providers likely familiar to readers of weekend newspapers: Black Robin and Westwood Terraces; Du Val (subject of an earlier regulatory offence); E+O Property Syndication; Provincia Property; Williams Corporation; Wolfbrook Capital; and Jasper NZ.
The regulator pinged all seven firms for “using non-compliant eligible investor certificates”.
As well, the FMA called out some providers for ill-targeted marketing practices designed to lure retail investors into the largely unprotected wholesale space.
“We remain interested in all advertising avenues utilised for advertising these types of offers. It is the responsibility of the offeror to ensure they do not engage in any conduct which would breach Part 2 (fair dealing) of the FMC Act,” the spokesperson said.
“As we have said, wholesale offerors using search terms such as ‘Sharesies’ and ‘term deposit’ is clearly going to reach, and potentially draw in, a non-expert audience, and therefore heightens responsibility on the offeror. We do not have a list of unacceptable words, as such, but firms should be exercising judgment and discretion to ensure their advertising search terms for wholesale offers reach the appropriate audience – experienced and/or professional investors.”
Despite the raft of problems identified in the property fund investigation, the FMA spokesperson said “at this stage we are not suggesting any changes” for government to tighten up the wholesale investor law.
“We expect this report and the warnings will have an impact on the sector, improving its compliance. If we do not see the improvements expected, we will consider what the most appropriate next step is.”
While the thematic review covered property funds only “the findings… are applicable to all wholesale offers”, the FMA report says.