The Financial Markets Authority (FMA) has just released its long awaited Guidance Note on Advertising offers of financial providers under the Financial Markets Conduct Act 2013 (FMC Act). This comes hot on the heels of last week’s direction to Du Val Group NZ Limited and Du Val Capital Partners Limited (Du Val) to remove certain advertising material likely to mislead or deceive investors.

This Financial Law Brief unpacks the Du Val direction to help place the latest FMA guidance in context.

The Du Val direction

The FMA considers statements made by Du Val contravened the ‘fair dealing’ provisions of the FMC Act.

The FMA gave a direction order because it considers certain promotional material Du Val used is likely to mislead or deceive potential investors. The FMA note that the promotional material indicated that:

• the risks associated with investments in their Mortgage Fund Limited Partnership (Partnership) were low. The FMA considers property development and investments in early stage finance for a property development project to be inherently risky; and

• there were no fees associated with the investment when the general partner of the Partnership was entitled to 100% of the profit after investors were paid. The FMA considers the right to retain any and all profit is effectively a performance-based fee.

The advertising appeared at various times on Du Val’s website and social media channels.

The direction order required Du Val to confirm to FMA it has complied with the requirements of the direction and to confirm it has reviewed its compliance processes for promotional material.

Du Val’s position

The Partnership is only open to ‘wholesale investors’. Du Val maintained that wholesale investors are inherently more sophisticated than others and that the level of seriousness of conduct and public interest in enforcement action was low.

The FMA disagreed with these arguments. The FMA considered the misleading representations were sufficiently serious in nature, and that some ‘large investors’ (which is a type of wholesale investor), are not inherently sophisticated. The FMA considered the promotion of the Partnership, particularly through social media, exposed an inexperienced audience to Du Val’s representations and enticed into its marketing ‘web’.

Du Val maintained that the Partnership’s information memorandum makes it clear that the Partnership general partner retains all profit above the 10% return to investors and such a profit-share arrangement is not a fee in the way a ‘fee’ is normally understood.

The FMA takes a broad interpretation of the term ‘fee’ and considers that it includes any means of payment to Du Val or the general partner from the Partnership.

FMA’s consultation on advertising offers of financial products

Earlier in the year, the FMA released a consultation paper on proposed guidance as to how it interprets the law around advertising offers. The Guidance Note has been finalised and was published on 13 October 2021.

One of the key principles in the Guidance Note is that it is the overall impression that counts when considering whether an advertisement is likely to mislead or be confusing. The direction order notes that some of Du Val’s advertising created an overall impression that the Partnership provided high returns and was low risk.

The Guidance Note also notes that fees and costs must be clearly disclosed such that they give a realistic impression of the overall fees and costs. The direction order notes that the lack of transparency about Du Val’s right to profits made was misleading.

What does this mean for you

The direction order indicates the way the FMA interprets the application of the ‘fair dealing’ provisions. That indication has now been reinforced in the form of the Guidance Note. The FMA has also indicated that it will be reviewing the use of the ‘wholesale’ exclusion, and in particular, the investor self-certification exclusion to ensure it is being used appropriately. The FMA expects organisations targeting ‘wholesale’ investors to reflect on their marketing practices. The FMA considers representations such as those made by Du Val are serious enough to support the publication of a direction order.

It may be a good time to consider your organisation’s current policies and procedures in place to ensure all advertising material complies with the ‘fair dealing’ provisions. Get in touch if you have any questions about your advertising material or compliance with the ‘fair dealing’ provisions in general.

A copy of the Guidance Note can be found here. A copy of the direction order can be found here.