The Fair Markets Conduct Act 2013 (Act) regulates the offer of financial products to the public, usually shares, often debt and sometimes other products that involve returns on interests in assets (real property interests for example).
Overview
The Act is highly relevant to any investment offer and extends beyond shares and debt securities to those products which may not be immediately obvious to an offeror.
The Act has two aspects. The first is that the starting point for such offers is that they can only be made if a product disclosure statement (PDS) is issued (like the old school prospectus). The second is that, irrespective of whether a PDS is required, a financial product offer cannot be misleading or deceptive. Significant portions of the Act parallel equivalent provisions in the Fair Trading Act 1986. In other words, “fair dealing” is required for all financial product offers.
For reasons that include time and cost, offerors often try to avoid the issue of a PDS. This is allowed provided that the offer comes within the exceptions in Schedule 1 to the Act.
There is a quite a range of exclusion options depending on the type of offer for example, offers to close business associates and relatives, employee share purchase schemes, small offers (which require notification to the Fair Markets Authority), offers to a restricted number of offerees and so on.
However, the widest potential exception is that for wholesale investors. An eligible investor is a sub-category of this exception category.
A wholesale investor is a person in a defined investment business, or who meets certain investment activity criteria, or who in defined terms is “large”, or the offer made to the offeree is itself sufficiently extensive in dollar terms. These are significant criteria.
In view of them and the likelihood that the general exception might not apply, there has been a tendency to rely on a subcategory of the wholesale investor exception: the eligible person offer.
Essentially, an eligible person must be certified by a financial advisor, accountant or lawyer as having sufficient prior experience in dealing with financial products to assess the offer, this not being dependent on the assets base of the offeree or the size of the offer.
This subcategory could be regarded as a loophole especially as an offeree can self-certify.
In 2022, the Financial Markets Authority, which administers the Act, noted some problems with the wholesale investor/eligible investor exception.
First, the fair dealing overlay was not always complied with in the marketing of offers particularly as it conflated wholesale investors and eligible investors, the latter having a particular technical meaning under the Act.
Secondly, the objective factual basis for a correct eligible investor certification under the Act was often lacking.
Thirdly, offerors and certifiers often did not consider whether the offeree was sufficiently advised on the grounds for and the consequences of certification, in particular, lessened protection under the Act. These failures could be an issue under the fair dealing sections of the Act and give rise to professional liability for a certifier.
The problem has not gone away despite the warning.
FMA Seeks Opinion from High Court
Recently, the Financial Markets Authority (FMA) filed a case stated with the High Court essentially asking for an opinion on the following issues (summarised only):
- Is a description required of the eligible investor’s experience with financial products justifying the issue of the certificate? Some industry views are that only a certificate is required, with no further due diligence required of a financial advisor, accountant or lawyer.
- Taking that question further, is the reference to financial products to both financial products generally and the particular financial product that is subject to the offer? Again, some industry views are that only a certification is required without additional description. If further investigation is required this could be done outside the certificate itself.
Overall, the thrust of the FMA case stated is that the certificate as to eligibility is a primary document and that the certification process must be taken more seriously in line with its 2022 concerns. For those involved in financial products offers, regardless of its outcome, the case stated is a warning that the exception provisions of the Act must be reviewed and applied rigorously.
