The fair dealing provisions have been an ongoing area of focus for the FMA for some time now and the FMA has said that it expects firms to “take immediate steps” to ensure that advertising is legally compliant. In these circumstances, financial markets participants should review their existing advertising or customer communications against the content of the Guidance Note.
Scope of the guidance
The Guidance Note specifically applies to advertisements of offers of “financial products”: debt securities, equity securities, managed investment products, and derivatives. Advertisements can be via any medium, including traditional forms of advertising as well as the internet (including promotion and search tools), text messages and “forums where issuers and investors can communicate". Posts made by social media influencers are also included within the definition of advertising. In some cases, the advertisement may not even need to mention an offer of a financial product if, for example, it focuses on an issuer who is making or planning to make an offer in the future.
Key principles for advertising
The Guidance Note sets out three key advertising principles:
- It is the overall impression that counts: the FMA is concerned with the holistic impression created by the advertisement when viewed for the first time by the audience the advertisement actually reaches (and not the audience intended by the advertiser). It is assumed that the audience is “neither unusually astute nor unusually gullible”.
The Guidance Note says that consumers cannot be expected to study or revisit an advertisement. Particular care needs to be taken when advertising complex products and/or to vulnerable customers (see our recent update on the FMA’s expectations about vulnerable customers). - Omissions can be misleading, deceptive or confusing: the FMA says that the full picture should be presented and “cherry picking” avoided to ensure the impression is not misleading, deceptive or confusing.
- Substantiate your claims: The Guidance Note states that representations must have a reasonable basis at the time they are made and there must be evidence to support those representations. A claim can still be considered unsubstantiated even if it later turns out to be true.
Advertising expectations
The Guidance Note formalises all of the standards and guidelines that were proposed in the FMA’s earlier consultation draft. In particular, it says:
- Advertising must be truthful and accurate.
- Take care when comparing different products.
- Balance risk and reward.
- Take care with phrasing and industry jargon.
- Forecasts must be based on reasonable and supportable assumptions.
- Do not over-emphasise performance at the expense of other material information.
- Warnings and disclaimers should be prominent.
- Clearly disclose fees and costs. Particular care should be taken when claiming there are “no fees” for a financial product as, if the issuer earns money from the product, the claim could be false or misleading.
- Do not claim to be endorsed, approved or regulated unless the claim is current and verifiable.
- Paid or sponsored content should be discernible from other content.
- Identify offers made only to wholesale investors. The advertisement should make immediately and prominently clear that it is not available to retail investors.
Specific guidance for advertising the performance history for managed funds
The Guidance Note includes a specific section on advertising historical investment returns. In particular, it says that such advertisements should:
- avoid advertising performance of financial products for periods of less than 12 months,
- ensure that performance periods chosen do not mislead or confuse,
- disclose more than one performance period,
- note how performance can vary over the minimum investment timeframe and longer, and
- provide additional information on the context for the performance of the product.
This specific guidance reflects an earlier warning issued by the FMA about large investment returns being advertised for the 12-month period to 31 March 2021 (given the impact of COVID-19 over this period).
Enforcement
The fair dealing provisions of the FMCA remain a key enforcement area for the FMA. The FMA has indicated that it is particularly interested in representations in advertisements regarding the nature, suitability and characteristics of a financial product. It has also indicated that it will take action on “any examples of marketing that takes advantage of vulnerable customers in the current COVID situation”.
The Guidance Note includes a specific section on enforcement. The FMA highlights the range of tools available to it, including formal feedback letters, public warnings and (where poor practice is more widespread) publishing monitoring reports. The FMA has specifically highlighted its ability to issue stop orders or direction orders to prohibit or modify behaviour that likely contravenes the fair dealing provisions. In the case of more serious breaches, the FMA can also apply to the Court for a pecuniary penalty or compensatory order.
Next steps
The Guidance Note appears to be a further instalment in the FMA’s ongoing effort to facilitate conduct that actively assists investors to make appropriate and considered decisions when accepting offers of financial products or financial services. The FMA has repeatedly emphasised the importance of customer communications that are clear, fair and not misleading. If enacted, the Financial Markets (Conduct of Institutions) Bill will require financial institutions to have a fair conduct programme that ensures communications are “clear, concise and effective”.
In this environment, firms may benefit from considering the contents and underlying principles of the Guidance Note against existing and proposed advertisements and customer communications.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.