Advertising investment returns for the last year could mislead investors

The Financial Markets Authority (FMA) is warning fund managers to avoid advertising large investment returns for the 12-month period from 1 April 2020 to 31 March 2021, where they may mislead investors.

Link to the media release is available here.

Who needs to read it? Why?

All businesses in the funds management industry should take note of the FMA’s warning – including fund managers, supervisors, and financial advisers.

Financial services should take this as a reminder to ensure that communications are not misleading and continue to be compliant with the Financial Markets Conduct Act 2013 (FMCA).

What does it cover?

The last 12-month period shows strong returns for many funds. This is because it excludes the February/March 2020 COVID-19 sell-off in the market, but includes the following recovery.

The FMA is concerned that advertising these returns for the 12-month period may mislead investors to thinking these are typical returns, or that particular managers have “significant, repeatable skill”.

The FMA has asked fund managers and financial advisers to:

  • “avoid advertising performance for the 12-month period to 31 March 2021 (or, where promotion has already happened, withdrawing advertisements and promotions) through any channels, including period-specific promotion on websites; and
  • ensure the content and tone of required or otherwise regular investor and customer communications, does not place undue emphasis on, or commentary equating to promotion of, performance over the 12-month period. This includes written or verbal communications.”

The FMA will be closely monitoring any provider’s (new or continued) promotion of strong returns for the 12 month period, and whether it may be a breach of the fair dealing provisions (in part 2 of the FMCA).

Our view

Fair and transparent financial advertising is important in helping achieve better investor outcomes.

This latest warning comes as the FMA is soon to finalise its guidance about advertisements for financial products, which will help provide clear guidelines on how the fair dealing rules apply in different contexts. (See our previous note on the consultation of proposed guidance here.)

Relevantly, the proposed guidance included the guideline to not overemphasise performance at the expense of other material information.

We may expect to see continued interest and scrutiny in the application of the fair dealing rules to advertisements in the financial services industry – by both the FMA and competitors.

What next?

If you have any questions on funds management, fair dealing and advertisements, or FMCA compliance in general, please contact one of our experts.

Who can help