16 February 2021 is the deadline for submissions on the planned Guidance Note from the Financial Markets Authority (FMA) on advertising offers of financial products. The Guidance Note will be of interest to anyone involved in offering financial products and services to the public, including those who deal with wholesale investors. This brief note sets out the key content of the proposed Guidance Note and some of our thoughts on its implications.
Financial product advertising
Advertising of financial products and services in New Zealand is regulated under the Financial Markets Conduct Act 2013 (FMC Act). Providers of financial products and services are subject to broadly defined “fair dealing” obligations. These provisions of the FMC Act prohibit engaging in conduct that is, or is likely to be, misleading or deceptive, making false, misleading or unsubstantiated representations or making certain unsolicited offers to members of the public.
Contravention of a fair dealing obligation may give rise to civil liability, including financial penalties and orders to pay compensation. Civil liability orders can only be made by a court.
The FMA has a unique power (without going to court) of issuing “stop orders”, which could prohibit publication of advertising or to prevent a product issuer from accepting investments. The FMA has a wide discretion to use these powers if it considers that advertising confuses, or is likely to confuse, consumers or investors on matters that influence their investment decisions.
In addition to the above, the FMC Act also includes specific rules for advertising financial product offers as part of a “regulated offer” to retail investors.
Need for the guidance note
The FMA has previously issued guidance on its approach to using stop orders to enforce the fair dealing provisions.
The proposed Guidance Note on advertising offers of financial products has a somewhat broader application. It sets out the FMA’s expectations of “good conduct” in the context of advertising and touches on a broad range of advertising-specific topics. Directors of issuers and key staff involved in preparing advertisements of financial products will need to become familiar with the content of the guidance.
The FMA has proposed three key principles for financial product advertising under the fair dealing obligations. These principles are likely to guide how the FMA views advertising and when it might exercise it stop order powers. Assuming these key principles are adopted in the final guidance note, they should be front of mind for anyone signing off on offer advertising. It is worthwhile, therefore, to set out the proposed key principles in full:
- It is the overall impression which counts – whether an advertisement is likely to mislead or confuse depends on the overall impression as perceived by the investor. The FMA considers that this means that:
- Advertising which is likely to mislead or confuse, without actually being misleading or confusing, is sufficient to breach the fair dealing provisions;
- Intent to mislead or confuse is irrelevant;
- Advertising (or conduct generally) is more likely to mislead where a financial product is complex or where the investor base being targeted is vulnerable or ill-informed;
- Representations that are true and verifiable in isolation are nonetheless capable, when viewed holistically, of generating a confusing or misleading impression overall. This may be the case where material information or qualifications to a representation (e.g., risks or downsides to a product) is disclosed in fine print.
- Omissions can be misleading – confusing information or misleading conduct extends beyond positive actions or positive statements – it also includes omissions, whether deliberate or inadvertent. It is not a defence to “do or say nothing” if silence or partial disclosure (e.g., cherry picking) is likely to leave an overall misleading or confusing impression on the investor.
- Substantiate your claims – this means having a reasonable basis for the representation at the time it is made. Anecdotal evidence, unsupported opinions and assumptions do not constitute a reasonable basis. The FMA is particularly interested in representations regarding the nature, suitability and characteristics of a financial product or service. A representation remains unsubstantiated even if the representation turns out to be true or is subsequently substantiated.
Key advertising principles in practice
The FMA elaborates in the draft Guidance Note about how it expects the key principles above to be applied in practice. The headline points are that:
- Advertising must be truthful and accurate;
- Care needs to be taken when comparing different products;
- Balance risk and reward in messages;
- Terms and phrases should be consistent with the meaning commonly recognised by investors – industry concepts and jargon should be avoided unless sufficiently explained;
- Forecast returns must be based on reasonable and supportable assumptions;
- Do not overemphasise performance at the expense of other material information;
- Warnings and disclaimers should be prominent;
- Clearly disclose fees and costs;
- Do not claim to be endorses, approved or regulated;
- Advertising must be discernible from other content; and
- Identify offers made only to wholesale investors.
We believe that the FMA’s proposal to release the Guidance Note on offer advertising is timely. While FMA guidance is not legally binding, it influences behaviour in the market as such publications indicate how the regulator is likely to use its discretionary stop order powers and what it expects from market participants. Having more “meat on the bones” of the broadly-drafted fair dealing provisions in the FMC Act will greatly assist issuers, advisers and other participants with advertising financial product offers.
Schedule 1 offers are an area where we believe the proposed guidance note would have an impact on improving advertising materials. We have seen a significant increase in recent years of offers under Schedule 1 being widely advertised to the general public, particularly in the property investment space. Such offers are targeted at high net worth and experienced investors, but the investors are not traditional financial institutions or professionals. Offer documents to such investors (which fall under the fair dealing provisions) will need to be prepared with the Guidance Note in mind. Existing materials would also be reviewed for consistency with the regulatory guidance.
The FMA has the draft Guidance Note open for public consultation until Tuesday, 16 February 2021. The draft is available here. If you have any questions about the proposed note please do not hesitate to contact us.
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