Fund managers may have to revisit drinks and hors d’oeuvre policies as the Financial Market Authority (FMA) pushes for purity in ‘responsible’ investment marketing practices.
In a speech at a Financial Services Council (FSC) event last week, Paul Gregory, director of the just-created FMA investments division, said fund managers would have to back-up product labels such as ‘ethical’, ‘responsible’ and ‘impact’ with clear evidence including how investor “capital continues to be aligned to the values you as a provider claim to share with them”.
Gregory told the FSC crowd that fund managers and other investment providers must “check their rhetoric” on responsibility against actual portfolio settings and even their own corporate behaviour.
For example, he said “if you claim excluding alcohol is ‘ethical’ – what are the actual ethics, the values and principles, underpinning that exclusion. Are they reflected more broadly, like in your staff and investor functions? And if they aren’t – is it truly an ethical position?”
But as the FMA calls last-drinks on ‘greenwashing’, it also plans to crack open an investigation into the ‘wholesale investor’ world. As reported last month, the FMA is currently consulting on the wholesale disclosure exemption for investors who place $750,000 in a single product: although, the consultation is limited in scope.
However, the FMA has much wider worries about the flow of possibly naive investors across the border into wholesale products, according to Gregory.
He said there was a danger of creating an “investor refugee crisis” as many people flee low-yielding term deposits [TD] in search of higher returns – often with large amounts of capital in hand.
The FMA had “concerns about those people being drawn to prominently advertised offers, which may require them to sign away their retail status and protections”, Gregory said.
Rob Everett, FMA chief, told the audience in a speech at the same FSC event that one of the regulator’s “focus areas for the year will be unregulated offers – such as those offered to wholesale investors”.
Even those in the regulated camp, though, would come under FMA scrutiny for their treatment of TD refugees.
“Where they come to managed investment schemes, where they don’t have to sign away those protections – including KiwiSaver now over-65s can open accounts and have access when they need it – we will still be looking hard at how they’re treated and the products they’re allocated,” Gregory said.
He also told the FSC delegates that the FMA would stand-by the KiwiSaver ‘value for money’ guidelines released for consultation last year. The FMA proposals – that could upend KiwiSaver adviser commissions, in particular – have sparked some kick-back from the industry.
Gregory said the FMA has received about 40 submissions on the KiwiSaver fee guidelines (that would also affect the wider funds market). While the regulator was still sifting through the detail, he said the submissions touched on some “quite fundamental matters” that were worth clarifying namely:
- the guidelines won’t ban any fee level or structure but merely require justification, regular review and better disclosure;
- KiwiSaver ‘mobility’ by itself can’t protect enough members from the “risk of harm” implicit in poor, or inappropriate, products; and,
- the market won’t self-correct by punishing any product failures in time.
Gregory said relying on market forces alone to prevent KiwiSaver product failures is “like saying earthquakes are the best resolution for poor building standards”.
“Like submitters on this point, the FMA can be philosophical about market rubble. Unlike those submitters, we can’t be philosophical – it’s not our job to be philosophical – about who’s caught in it,” he said.
“So yes it will be the market, not the FMA, eliminating unreasonable fees and poor value. But we should – and will – help the market do it sooner…”
Everett laid out five key themes for the regulator in 2021, covering:
- environmental, social and governance (ESG) etc finance;
- vulnerable customers – including buy-now-pay-later users;
- the regulatory perimeter – such as wholesale fund offers;
- online retail share-trading; and,
“Significant work is underway to prepare the FMA for its new remit and whatever else the Government, markets or fate throw our way,” he said. “While we’re focused on that future, it’s vital that we continue to do our current job and don’t drop the ball – just as industry cannot afford to drop the ball as it readies for future changes.”
The FMA budget is set to move from beer to champagne standards over the next few years, almost doubling from the 2019/20 allocation of $36 million to over $60 million by 2023, mostly funded by industry levies.