The dark side of the NZ investment world
Article written by InvestNow – 3rd May 2022
The NZ investment world, like the moon, has a permanent dark side.
And operating beyond the brightly lit licensed fund hemisphere, wholesale managers have long flourished in the regulatory shadows.
The NZ wholesale investment market, though, remains largely an unknown space even to the Financial Markets Authority (FMA), which claims loose governance powers over the territory.
But the regulator is at long last about to shine some light into the wholesale void, according to newly installed FMA boss, Samantha Barrass.
In a speech to a financial industry gathering this March, Barrass confirmed the FMA was “taking a deeper look at the wholesale investing sector”.
“These investments are on the edge of our regulatory remit and we want to better understand who is investing in these products and the level of risk for investors,” she said.
“We are particularly focused on whether/the extent to which vulnerable consumers and people who are, in practice, retail investors are accessing wholesale markets and the harm this may cause them and their families.”
The wholesale exemption from most retail product disclosure and compliance obligations has some logic to it, specifically, carving out sophisticated institutional investors from pointless paperwork.
However, the various definitions of ‘wholesale investor’ – enshrined in a couple of different laws – may have pushed the exemption well beyond its intended scope.
Under current rules, almost any investor can effectively self-select as a wholesale player, bypassing the important protections afforded via licensed regulated products (often called ‘retail funds’ in the industry).
InvestNow founder, Anthony Edmonds, says “we believe it’s critical that people understand what they are investing in”.
“When it comes to ‘wholesale’ funds, this means knowing and clearly understanding that these are unregulated, giving investors no real protections under the Financial Markets Conduct Act (FMCA).,” Edmonds says. “The FMCA governs how financial products are created, promoted and sold, and the ongoing responsibilities of those who offer, deal and trade them. ‘Wholesale’ funds do not offer the investor this same level of protection”.
FMA throws shade on wholesale offers
The FMA has already made some moves to push back against wholesale abuse of the potential loophole.
Last October, for example, the regulator slapped wholesale property investor group, Du Val, with an order to pull its advertising campaign for a mortgage fund.
At the time, the regulator said Du Val relied on a wholesale exclusion “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 said in a statement. “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.”
In March this year, the regulator went even further with a stop order issued against the weirdly named ‘The One in Longhorn Partnership Fund’, another wholesale offer promoted by The One Management GP Limited and James Law Realty.
The FMA put a halt to sales and promotion of the Longhorn fund based on concerns “about statements by The One Management GP Limited regarding the Fund’s returns payable to investors and the level of risk in the investment”.
Despite the FMA’s angst, Du Val has continued advertising to attract ‘wholesale’ investors on mainstream press and through social media platforms.
Unclearly regulated
If the regulator is belatedly tackling the wholesale issue with its somewhat limited powers over the sector, the licensed investment industry is also calling for more clarity on this important matter.
For example, in a submission on proposed fund advertising standards last year, InvestNow parent company, Implemented Investment Solutions (IIS), suggested the term ‘wholesale’ itself could be misleading, creating a false aura of quality and low fees when attached 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,” the IIS submission 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.”
Encouragingly, the recent FMA actions and statements from Barrass indicate that the regulator is keen to push ahead with better policing of the wholesale sector.
“This is really important to me, and I would hope that we can work with all of you towards the outcome that only genuinely sophisticated, knowledgeable people access wholesale markets,” she said in the speech.
Licensing, disclosure show the way
In the interim, however, Edmonds says most investors should probably avoid wholesale funds altogether.
“One of our key principles is that you should only invest in what you know,” he says. “And the licensed product regime offers the higher standard of disclosure that investors need to build their knowledge of how their money is being managed, who is managing it and where the assets are held.”
InvestNow includes a full library of disclosure documents for all the products available on the platform as well as links to tools that help investors assess the suitability of funds.
NZ has a long history of investors caught out by inappropriate wholesale offers – most recently the Christchurch-based Penrich Global Macro Fund that saw 150 investors defrauded of about $80 million.
Kelly Tonkin, Penrich chief, was sentenced to eight-and-half years in jail last December, prompting Serious Fraud Office director, Julie Read, to comment: “It is important that investors are able to trust the advice and information provided by those managing their money. Actions such as Mr Tonkin’s undermine this trust and threaten the integrity of financial markets.”
Edmonds says licensed investment managers have a clear, legal duty to provide accurate, and up-to-date, information to investors.
“Licensing is no guarantee against financial loss,” he says. “But investors in regulated products can at least be assured their money is being looked after in a transparent way via rigorous legal structures and third-party oversight.”
Investors, of course, need to understand the fine-print of regulated products, too, but it’s much easier to read in the sunlight.
The dark side of the NZ investment world
Article written by InvestNow – 3rd May 2022
The NZ investment world, like the moon, has a permanent dark side.
And operating beyond the brightly lit licensed fund hemisphere, wholesale managers have long flourished in the regulatory shadows.
The NZ wholesale investment market, though, remains largely an unknown space even to the Financial Markets Authority (FMA), which claims loose governance powers over the territory.
But the regulator is at long last about to shine some light into the wholesale void, according to newly installed FMA boss, Samantha Barrass.
In a speech to a financial industry gathering this March, Barrass confirmed the FMA was “taking a deeper look at the wholesale investing sector”.
“These investments are on the edge of our regulatory remit and we want to better understand who is investing in these products and the level of risk for investors,” she said.
“We are particularly focused on whether/the extent to which vulnerable consumers and people who are, in practice, retail investors are accessing wholesale markets and the harm this may cause them and their families.”
The wholesale exemption from most retail product disclosure and compliance obligations has some logic to it, specifically, carving out sophisticated institutional investors from pointless paperwork.
However, the various definitions of ‘wholesale investor’ – enshrined in a couple of different laws – may have pushed the exemption well beyond its intended scope.
Under current rules, almost any investor can effectively self-select as a wholesale player, bypassing the important protections afforded via licensed regulated products (often called ‘retail funds’ in the industry).
InvestNow founder, Anthony Edmonds, says “we believe it’s critical that people understand what they are investing in”.
“When it comes to ‘wholesale’ funds, this means knowing and clearly understanding that these are unregulated, giving investors no real protections under the Financial Markets Conduct Act (FMCA).,” Edmonds says. “The FMCA governs how financial products are created, promoted and sold, and the ongoing responsibilities of those who offer, deal and trade them. ‘Wholesale’ funds do not offer the investor this same level of protection”.
FMA throws shade on wholesale offers
The FMA has already made some moves to push back against wholesale abuse of the potential loophole.
Last October, for example, the regulator slapped wholesale property investor group, Du Val, with an order to pull its advertising campaign for a mortgage fund.
At the time, the regulator said Du Val relied on a wholesale exclusion “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 said in a statement. “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.”
In March this year, the regulator went even further with a stop order issued against the weirdly named ‘The One in Longhorn Partnership Fund’, another wholesale offer promoted by The One Management GP Limited and James Law Realty.
The FMA put a halt to sales and promotion of the Longhorn fund based on concerns “about statements by The One Management GP Limited regarding the Fund’s returns payable to investors and the level of risk in the investment”.
Despite the FMA’s angst, Du Val has continued advertising to attract ‘wholesale’ investors on mainstream press and through social media platforms.
Unclearly regulated
If the regulator is belatedly tackling the wholesale issue with its somewhat limited powers over the sector, the licensed investment industry is also calling for more clarity on this important matter.
For example, in a submission on proposed fund advertising standards last year, InvestNow parent company, Implemented Investment Solutions (IIS), suggested the term ‘wholesale’ itself could be misleading, creating a false aura of quality and low fees when attached 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,” the IIS submission 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.”
Encouragingly, the recent FMA actions and statements from Barrass indicate that the regulator is keen to push ahead with better policing of the wholesale sector.
“This is really important to me, and I would hope that we can work with all of you towards the outcome that only genuinely sophisticated, knowledgeable people access wholesale markets,” she said in the speech.
Licensing, disclosure show the way
In the interim, however, Edmonds says most investors should probably avoid wholesale funds altogether.
“One of our key principles is that you should only invest in what you know,” he says. “And the licensed product regime offers the higher standard of disclosure that investors need to build their knowledge of how their money is being managed, who is managing it and where the assets are held.”
InvestNow includes a full library of disclosure documents for all the products available on the platform as well as links to tools that help investors assess the suitability of funds.
NZ has a long history of investors caught out by inappropriate wholesale offers – most recently the Christchurch-based Penrich Global Macro Fund that saw 150 investors defrauded of about $80 million.
Kelly Tonkin, Penrich chief, was sentenced to eight-and-half years in jail last December, prompting Serious Fraud Office director, Julie Read, to comment: “It is important that investors are able to trust the advice and information provided by those managing their money. Actions such as Mr Tonkin’s undermine this trust and threaten the integrity of financial markets.”
Edmonds says licensed investment managers have a clear, legal duty to provide accurate, and up-to-date, information to investors.
“Licensing is no guarantee against financial loss,” he says. “But investors in regulated products can at least be assured their money is being looked after in a transparent way via rigorous legal structures and third-party oversight.”
Investors, of course, need to understand the fine-print of regulated products, too, but it’s much easier to read in the sunlight.
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