Legal firm Dentons Kensington Swan (DKS) has called for more disclosure flexibility for “evolving products” in the wake of the recent regulatory broadside against responsible investment manager compliance practices.
The DKS analysis says the Financial Markets Authority (FMA) review of so-called ‘integrated financial products’ – or IFPs – highlights the need for reform of an out-of-date disclosure regime.
Last week the FMA found current IFP disclosure practices failed to meet its 2020 ‘guidance’ standards with the regulator laying out tough new reporting expectations for product disclosure statements (PDS) and other investor communications.
However, DKS says the regulatory review flags “bigger problems with the FMC [Financial Markets Conduct Act] disclosure regime as a whole, rather than with IFPs”.
“Principles-based regulation, and FMA’s stated desire to not create undue regulatory burden, requires flexibility for evolving products and offers,” the legal firm says. “Issuers should not be penalised simply because the law cannot keep pace with ever rapid change.”
The DKS paper says while a wholesale reform of the disclosure rules is probably not on the table, the FMA does have the ability to make IFP compliance more palatable.
“With a focus on flexibility and innovation, not to mention confident and informed participation, we think the FMA should look to put in place a class exemption (as well as seeking expedient regulatory reform) for schemes and funds that include non-financial considerations or an IFP focus,” the DKS article says. “An exemption would provide space for additional information to be included in the PDS and readily allow managers to meet the FMA’s current ‘expectations’.”
And more extensive IFP-type disclosures would fit better on provider websites rather than in rarely consumed legal documents, according to DKS.
“Websites function as a good ‘one stop shop’ for all key scheme information. We think that the FMA should encourage managers to use their websites to augment their prescribed disclosure obligations: ‘available, free of charge, on an Internet site maintained by the manager’ (to paraphrase the FMC Regulations),” the paper says. “Surely that will produce a better outcome than trying to shoehorn more content in a packed PDS?”
Furthermore, DKS notes a potential mismatch between the FMA ‘guidance’ and legal disclosure obligations concerning environmental, social and governance (ESG), socially responsible investment (SRI) or other such claims falling under the IFP banner.
“There is a clear gap between making unsubstantiated claims about ESG/SRI credentials (which is unlawful) and simply excluding from your disclosure documents all of the details that the FMA would like to see you spelling out. This might conflict with the IFP guidance, but is not unlawful unless actually misleading.”
Overall, the regulatory review may have over-spiced concerns about “widespread greenwashing” in the NZ funds market, DKS says, triggering a rash of “misleading headlines”.
“The FMA itself has added fuel to that fire, saying fund managers need to ‘take the necessary care not to mislead or confuse investors with greenwashing’, despite the fact the regulator was not assessing whether or not greenwashing was actually occurring,” the August DKS report says.
“There is just a taste of irony in that warning.
For fund managers choosing to cook with ESG/SRI ingredients, the FMA’s expectations are fairly clear, but they don’t make applying the IFP guidance any easier in practice.”
The DKS financial law team includes partners Catriona Grover and David Ireland along with senior associate Mark Schroder.