Proposed new restrictions on financial product advertising could backfire, exposing investors to greater risk of harm from unlicensed operators, according to submissions to the regulator.
Under the Financial Markets Authority (FMA) proposed advertising guidelines released last November, regulated providers would be disadvantaged compared to the light-touch treatment of wholesale offers, the Boutique Investment Group (BIG) argues in its submission.
BIG says the local market is “awash” with ads from wholesale or bogus entities that face little or no regulatory scrutiny. By contrast, investment firms caught under the Financial Markets Conduct Act have to produce reams of “regulated documentation”, much of which may have to be disclosed in ads if the FMA draft guidelines stand.
“The market will only suffer if the FMA, essentially allows this [unregulated] segment of the market to proliferate with its advertising while at the same time suppressing advertising by businesses that are well regulated, that can easily be held to account in New Zealand and that offer fundamentally good products (as most licensed MIS Managers will do),” the BIG submission says. “… based on the FMA’s position in its consultation paper as drafted, we would have less freedom to advertise than those higher risk entities, so the FMA in fact appears to be enabling these kinds of alternate offer at our expense.”
Similarly, the Implemented Investment Solutions (IIS) submission says the guidelines should focus on reining in advertising for firms outside the regulatory ‘perimeter’ that takes in “wholesale offers, as well as things like online platforms (which may in fact be offshore)”.
“The guidelines for regulated licensed products should be far more flexible and accommodating (than those that should exist for things that aren’t licensed or are lightly regulated),” IIS says. “The FMA should have confidence in the licensing regime that exists for managed investment schemes in its entirety.”
Furthermore, the IIS submission suggests the term ‘wholesale’ is potentially misleading, creating a false aura of quality and low fees when tagged to financial products.
“Ideally, we think that the word ‘wholesale’ should be replaced with the word ‘unregulated’ to make it very clear that investors are stepping outside of the safety net that the regulations and licensing regime provides,” IIS says. “Alternatively, the FMA could simply make it a requirement that any material or advertisement relating to a wholesale offer contains a large warning that the fund/product is ‘Not Regulated’. We think that this would remove a lot of confusion within the market.”
Both BIG and IIS also call on the regulator to rethink its proposal to require upfront disclosure of all main risks, even in small online display ads. The FMA proposals would likely prohibit the common practice of short-form online ads where readers can ‘click through’ to more detailed compliance information.
However, the regulatory proposal says if FMC-regulated firms can’t comply with the disclosure provisions “then a short-form advertisement must not be made”.
“We think it is natural for consumers to drill down into information on different products, and that this is entirely sensible for investment funds and schemes,” the IIS submission says. “Information regarding an investment product can be presented sensibly in a layered way where people click from an advert, down into more details about a fund.”
BIG also says the FMA proposal would both limit advertising to large brands (at the expense of innovative competitors) while making it more difficult for consumers to access useful information.
The 36-page submission from the boutique industry coalition further highlights a number of mainstream media anomalies that saw, for instance, dubious investment offerings appear in the NZ Herald and the Microsoft MSN news service.
“As far as our group is concerned, if entities like the Herald and Microsoft are running what appear to be scam offers of this nature alongside our credible ones, then this becomes very undermining for legitimate boutique providers who may not have established a strong brand recognition,” BIG says.
“… Another media related issue also worth considering is that many of the industry experts that are asked to comment on morning shows etc, are there because they pay to be there as the independent expert. Conversely the media often will not hear from experts if they are not prepared to pay. The lack of transparency around these practices is problematic.”
BIG, chaired by Nikko Asset Management NZ general counsel, Simon Haines, represents almost 20 local investment firms.
The FMA had received 29 submissions on the ad guidelines prior to the February 16 deadline.