The high interest rates on wholesale offers are attractive but investors risk losing some consumer protections. Photo / Getty
In bold print, the advertisement offers returns of 6, 7.5 or even 8 per cent.
In the fine print, almost too small to read unless you squint, it says "offer only available to wholesale or eligible investors".
These unregulated high-risk investment opportunities, largely in the property sector, are nothing new in New Zealand.
What is new is the pressure on investors desperately looking for better returns in a world where interest rates have fallen to virtually zero.
Rob Everett, chief executive of New Zealand's investment regulator the Financial Markets Authority, last month told industry representatives that unregulated offers would be in his sights this year.
"One of our focus areas this year will be unregulated offers - for instance those offered to wholesale investors who sign away some of the rights that a retail investor would have.
"Not surprisingly, our concern is that inexperienced investors will be attracted by the impressive returns that are promised, especially in the property space, and especially given the low interest rate and low return environment in many other assets."
Everett says it is crucial that investors are fully informed of the risks associated with those investments and that offerors are giving investors the right information.
David Ireland, a lawyer at Dentons Kensington Swan who specialises in investment security law, believes a further step is needed: a review of how people qualify to become a wholesale investor.
He says the wholesale investor category is one that has been left largely unchanged, bar a few tweaks, since 2013.
"The concerns expressed by Rob Everett, there are substance to those concerns when you step back and look at the current regulatory settings. I think there is a good case to revisit the criteria and look at whether we have got the settings right."
There are two main ways individuals can qualify for wholesale status: by having enough wealth, or through investment experience.
The wealth route requires either having $1 million in investable assets or a net worth of more than $5m. Investors can also qualify if they can afford to put $750,000 into an investment.
Those going down the investment experience track have to be signed off as an eligible investor by a financial adviser, lawyer or accountant.
Katrina Shanks, chief executive of Financial Advice New Zealand, says rising property prices mean more people can potentially qualify for the wealth category without having much investment experience.
With property prices so high, she says, "someone can sell a property and may be eligible but actually doesn't have sophistication or the knowledge to understand necessarily the market.
"Whereas previously an average house price wouldn't give you that accessibility, now it does. I think the regulators and the legislators have to be aware of that, especially in Auckland."
Ireland says in his view the criteria and the checks and balances are fairly loose.
"So someone could get an inheritance of $500k and invest it into a unit trust one year and next year say 'I don't like the one I was in before because it performed really badly' and so transfer the money into a different unit trust.
"I have now satisfied the investment activity criteria which means I can be a wholesale client if I wanted to, which means I can invest into any investment opportunity that is not registered on the disclosure register from a non-licensed offeror - so somebody who has not been through a health check by the FMA."
Likewise, he says a retiree could meet the $5m net worth requirement by selling a family home in Remuera - despite having no investing experience.
"They may have no expertise whatsoever to know what they are doing."
Ireland says the person making the investment offer just needs to be confident that the investor has the money.
"There is a certification process there, but that is more of a system to give comfort to the person relying on the investor's status and it is self-certification from the investor."
That self-certification does not have to be approved or checked by any third party.
"Unless the person receiving it has reason to believe that my certificate has been improperly given or is not valid, they don't need to ask any questions. They just need to get somebody who is excited by the proposition to say 'yep I've got $1m worth of investments over last couple of years' - then you are away."
An eligible investor has to get sign-off that they have investment experience and understand the risks of going into a wholesale offer.
There is nothing to stop a financial adviser who gives that sign-off from also taking a commission on the investment product being sold to the client, although they now have to disclose the commission under a law change that came in on March 15.
Ireland said applicants did not need to provide a lot of evidence to prove they had investment experience.
"If somebody comes along to me and assures me they know what they are doing, I tell them that the risks of you doing this is you can invest into an unregulated offer that might be issued by somebody that is not licensed or is not otherwise subject to full regulation - then I have advised them of the consequences.
"So it is quite loose, putting it mildly. If you look at your ... vulnerable elderly investor who is struggling to get a financial return on their investment in the low interest rate environment, they are excited by the promised high returns which may be a quite legitimate investment opportunity.
"But they are higher risk and the reason for the higher returns is they may be problematic."
Ireland says one of the biggest problems with these investments is that they are illiquid, making it harder for people to get their money out if they ever need it in a hurry.
Exactly how many retail investors are putting up their hands wanting to sign up for wholesale investments is unknown.
But Ireland says he is aware of a number of big investment advisory firms which are not comfortable with the criteria and have additional requirements to prevent retail investors being caught out.
"A lot of the big houses, our impression is they are taking that approach.
"Any of the stockbroking firms have been grappling with this; they have got clients who do fancy themselves as being able to play the market. They are at the pointy end of this tension."
Ireland said one of the large banks he worked with was also going down the route of saying 'we are not comfortable that the base level that regulation has set is high enough' because from a culture and conduct point of view, we don't think it is the right thing to do."
But he is worried that only the heavily-regulated part of the investment community is taking that approach. "Those on the fringe who have not been part of that regulatory [intervention], and may be less concerned about conduct perceptions, may be just following the letter of the law."
Ireland believes a lot of selling of wholesale investments goes on underground, with people selling lists of potential investment candidates who have been assessed by various sources as likely to be wholesale investors to overseas-based financial advisers.
"I know I will get contacted simply because I am a lawyer - others will be on a list because they have gone to the cattle yards, you are part of the farming community therefore you are tagged as being likely to satisfy the wealthy criteria.
"Advisers who are operating on the fringe of the regulatory environment will then buy those databases to contact those people, to encourage them with these opportunities and a lot of these advisers will be offshore."
Ireland says some of those advisers are legitimate but can't be licensed by the New Zealand regulator because they are not based in this country.
"So they are effectively forced underground.
"Almost all the planets are aligning to encourage investors desperate for a decent return, matched with providers equally desperate to get people to invest into their opportunities.
"It can all be done quite legitimately through the current regulatory settings and you are just relying upon the good behaviour of what is an unregulated community, so somebody who wholly targets wholesale clients with wholesale investment opportunities has very limited regulation, other than they have got fair dealing constraints - they are still not allowed to lie, deceive, mislead but they have not been put through the rigour of the full regulatory environment tests involved."
But Simon Papa, a lawyer at Cygnus Law, whose clients include those making wholesale offers, says the other side of the coin is that businesses need access to capital and people with a lot of money should be able to afford professional financial advice.
"The reason these categories are there is trying to strike a balance. The intention isn't to completely shut off businesses from capital, and the idea is we should draw the line somewhere to allow people to raise money without huge cost burdens.
"In principle I think the $750k limit is fine. The idea is when you are investing that amount of money, you can afford to get some advice on it.
"The concern is that there is a proportion of vulnerable people there who sell one property in Auckland and have suddenly got enough money to invest and some of those people are not remotely sophisticated and are at risk. But they might be at risk if they have got $5m, so it is a question of where you draw the line on that because at the same time, do you say you can only invest in super-safe investments? Or super-regulated investments?"
He said New Zealand's wholesale investment category was fairly similar to other countries.
"From a policy perspective, unless there is evidence that it is causing significant harm I don't think there is a basis currently to change that category."
Papa says if he has a concern, it is with the way the offers are being promoted.
"I think there is a role there for FMA in what is actually being said in the documents."
He said when he worked with clients on their offer documents for a wholesale offer, it was not that different to a regulated offer, because of the fair dealing obligations which imposed restrictions on what an offer can say, and how it is said.
"The FMA has just put out guidance on property syndications and highlighted, you do need to read those documents.
"People do get, they see that headline number ... 5, 8 ,10 per cent, but there are a lot of caveats on that and the key thing is to create offer documents that fairly disclose the risks."
He says offers brought to him often start with a document that is very much a marketing tool, and end up with something he believes gives a fair and balanced view.
"So if you read it you wouldn't be gung ho about it - because you will realise there is pros and cons and it is not risk-free."
Those who choose wholesale investor status give up a lot of protections.
Wholesale investment offers do not have to have a product disclosure statement, or PDS. All retail offers, on the other hand, must have a PDS which sets out the benefits, key risks and features of the investment, in clear, concise and effective language that will be understood by a non-expert investor.
The FMA has a range of powers it can use in relation to retail investment offers and can intervene where necessary, but it has little oversight of wholesale investment offers.
Another key protection for retail investors is the licensing of certain firms, such as providers of managed investment schemes, by the FMA.
Financial services firms that make investment offers to the general public must also belong to an approved dispute resolution scheme, so if something goes wrong, the investor has access to a free impartial mediation service.
The FMA's Everett says there is a crucial difference between high investment risk and poor investment decisions and disclosures.
"Regulators are not here to prevent the offer of investments that carry risk or may be, with hindsight, just bad investments. We are here to make sure the risks and returns are properly represented and to caution investors to consider the risks they are taking.
"Investors signing away some of their rights by getting themselves classified as wholesale investors need to think hard about the risks that they are taking."
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