We’ve taken a deep-dive into the FMA’s new guidance around advertising financial products. Read on for an overview of the key elements of the guidance, including possible sanctions by the FMA for breaches and our recommendations for reducing the risk of non-compliance.

On 13 October 2021, the FMA issued new guidance on the advertising of financial products, which includes (but is not limited to) debt securities, equities, managed fund products and derivatives.

Advertising is defined in the guidelines as advertising via any medium, including (but not limited to):

• Social media and professional networking sites, including associated mobile phone applications and posts made by social media influencers

• The internet, including news websites, and associated promotion and search tools

• Magazines and newspapers

• Radio and TV

• Outdoor advertising, including billboards, signs at public venues, and transit advertising

• Mobile phone messages

• Project brochures and promotional fact sheets

• Direct mail (written or electronic)

• Group presentations, seminars and advertorials

• Newsletters and updates

• Forums where issuers and investors can communicate.

Central to the application of these guidelines are the Fair Dealing provisions outlined in Part 2 of the Financial Markets Conduct Act 2013 (FMCA), which prohibit conduct that is misleading or deceptive (or likely to mislead and deceive), and making false and misleading representations. The FMA is also able to use Stop Order provisions outlined in Part 8 of the FMCA to stop or prevent “restricted communications” such as advertising of financial products, that confuses and misleads, or is likely to confuse or mislead consumers or investors on matters that influence investment decisions.

The guidance focuses on the overall impression given by advertisements, regardless of the intention of the advertisement. A factually correct advertisement may still be regarded as misleading or deceptive if the overall impression test is not met. The relevant test for whether something is confusing, misleading or deceptive is on the reaction of an ordinary and reasonable (or typical) member of the advertisement’s audience – normally anyone who is neither unusually astute nor unusually gullible. There can be no expectation that a potential investor will further investigate the claims or information in the advertisement. The assumption must be that they will take it at face value; therefore, the most important consideration is the overall first impression created by the advertisement.

For the purposes of the FMA’s guidance, the “audience” is defined as the audience that the advertisement actually reaches, rather than the audience the advertiser has intended it for. It is worth noting that omissions can be confusing, misleading and deceptive as well. For example, an advertisement can include factually correct and accurate representations, but key information, if omitted, may result in the audience being left with a misleading overall impression.

The guidance also sets out advertising expectations and outlines certain areas for consideration. These include (but are not limited to) the following:

• Advertising must be truthful and accurate – e.g. key information and exceptions buried in the fine print will not correct any misleading impression created by a prominent misleading headline.

• Care should be taken when making comparative advertising, particularly with other financial products – e.g. if dissimilar products are compared, the differences need to be clearly explained, not hidden in a footnote, and attention needs to be drawn to the differing risks and features in the advertisement.

• A balanced message is important for ensuring overall impressions and expectations formed by investors are realistic – e.g. the use of certain words such as ‘safe’, ‘relatively secure’, ‘low risk’, ‘guaranteed’, ‘highly liquid’, ‘highly secure’ must be carefully considered, as the use of these words could easily result in an investor forming an incorrect impression about an offer or product.

• Industry jargon should be avoided unless it is sufficiently explained and able to be understood by the audience.

• Forecast returns should only be included when there are reasonable grounds to do so. Managed investment scheme (MIS) providers should not advertise forecast or expected returns unless they can demonstrate it is in their investors’ interests to do so. Forecast returns should be stated net of fees and costs.

• Performance history should not be overemphasised at the expense of other material information. Advertising that covers performance of a financial product of less than 12 months is more likely to mislead and confuse and more likely to have been ‘cherry-picked’ to give a favourable impression. For example, the Covid market ‘crash’ throughout March 2020 and its subsequent rebound and recovery to the first half of 2021 resulted in phenomenal 12 month returns at 31 March 2021 in the market. As a result, the FMA warned the funds management industry in April 2021 to avoid advertising large investment returns for the 12-month period to 31 March 2021 (hence ‘cherry-picking’), as this could mislead investors.

• Warnings and disclaimers should be prominent.

• Offers made only to wholesale investors must be prominently displayed and clear they are not available to retail investors.

The FMA outlined a variety of enforcement actions available, depending on the severity and level of misconduct. These range from engagement and amendment through dialogue, to stop and direction orders, to the use of civil liability provisions for the more serious breaches. A case in example was the FMA’s public direction order (through Fair Dealing provisions) to property development and investment company Du Val, to remove advertising materials likely to mislead or deceive investors. The FMA concluded that advertisements put out by Du Val in relation to its Mortgage Fund Limited Partnership, contained statements comparing favourable returns of their products to bank term deposits but without a balanced view of the risks.

Since the release of the guidance in October 2021, a number of advertisements made by various MIS managers have been identified by the FMA for review, some of which have subsequently been deemed to have breached the new guidelines (and FMCA Fair Dealing provisions). These breaches were a result of failure to meet those considerations outlined above, and ultimately failure to meet the FMA’s overall impression test. Financial product advertisers including MIS Managers should be cautious given the increased levels of scrutiny by the FMA, and a less tolerant approach than before.

The following recommendations are just a few which will help reduce the risk of non-compliance:

• A comprehensive, Board-approved, advertising policy and procedures should be documented and maintained. The document should outline the appropriate delegations, review and approval structure for the advertising process. The staff involved in the advertising sign off process should have first-hand knowledge of the advertising claims.

• If the advertising process has been delegated by the Board to management, the Board should periodically seek confirmation from management that advertising delegations are strictly adhered to.

• Any comparative advertising requires careful consideration. Providers should ensure that any representation relating to the benefits of their product compared with similar financial products is based on reasonable grounds and those grounds are documented and approved by the provider as part of the sign off process.

• Websites should be regularly reviewed for accuracy and the content should be aligned with that of disclosure documents.

• Advertising campaigns which have a broad target audience should consider:

  • Review by legal counsel that specialises in the area of financial product advertising and/or the supervisor.

  • Testing the proposed advertisement with focus or consumer groups to check how the advertisement will be perceived and whether their overall impression of the advertisement is as intended.

• Major advertising campaigns which have the broadest target audience should be noted in Board or governance committee minutes.

• The advertising process (including the publication of offer documents) and relevant risks should be considered in the advertiser’s Compliance Assurance Programme (CAP), where the process is tested for effectiveness on a regular basis.