Wednesday, August 10, 2022

Appeal against FMA direction dismissed

The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko has welcomed a High Court ruling upholding an FMA direction order against property development and investment company, Du Val, dismissing all grounds of appeal.

In October 2021, the FMA directed Du Val to remove advertising materials likely to mislead or deceive investors, saying they contravened ‘fair dealing’¹ provisions in the Financial Markets Conduct (FMC) Act.

The FMA said the statements created the impression investing in financial products connected to property development was low risk when, in fact, property development, including associated finance, is inherently risky. The statements also claimed there were “no fees”, despite Du Val retaining any profit on projects above the return to investors. Du Val’s offers used the wholesale investor exclusion in the FMC Act.

In its appeal of the direction order, Du Val argued: the FMA failed to correctly identify the relevant class of ‘consumers’ (i.e. wholesale investors); wholesale investors are inherently more sophisticated than non-wholesale investors and are capable of evaluating the merits of an offer; and the FMA incorrectly determined Du Val’s right to retain any profits was a “performance-based fee”.

In his decision, Justice Ian Gault agreed with the FMA’s argument that the FMC Act was intended to protect all investors and there are varying degrees of sophistication and experience among wholesale investors, which means not all are inherently sophisticated.

“…I do not consider the FMA erred in law by declining to accept that wholesale investors are inherently more sophisticated than non-wholesale investors and are considered to be capable of evaluating the merits of an offer or accessing necessary information,” Justice Gault said.

The Judge also considered the FMA did not fail to identify the relevant class of investors. He noted the FMA’s arguments that mass media has the capacity to reach a wide audience and promoters should consider the characteristics of the actual audience that is likely to see the advertisement.

“Where the features or complexity of a product is such that it will only be appropriate for a limited group of people, promoters should do their best to ensure that the advertisement only targets that group and not a wider audience,” the Judge said.

Finally, regarding the ‘fee’, the Judge found that it is a question of fact of what “fee” means to potential investors and that it was available to the FMA to make the determination that the fees representations were misleading.

“We welcome this judgment, which recognises that the fair dealing provisions of the law are intended to protect all investors from misleading advertising,” said FMA Director of Investment Management, Paul Gregory.

“ Wholesale offerors should pay close attention to this case and take care how they market and advertise to prospective investors.”

Follow the link to read the High Court Judgment: Du Val v Financial Markets Authority

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