Last week the High Court delivered its judgment on how the eligible investor exclusion used in the wholesale investment sector should be interpreted under the Financial Markets Conduct Act (FMCA).
What is the eligible investor exclusion?
The eligible investor exclusion allows an offeror of financial products, or a provider of a financial advice service, a client money or property service, or a discretionary investment management service (DIMS), to offer financial products or supply those services to an ‘eligible investor’ without complying with the disclosure requirements under Part 3 of the FMCA (which includes the requirement to publish a Product Disclosure Statement), or the regulatory requirements applicable to the supply of services under Part 6 of the FMCA. To be an eligible investor, the person must provide a certificate to the offeror or provider of the service, essentially certifying as to the sufficiency of their investment experience, accompanied by a confirmation from a financial adviser, accountant or lawyer.
Why was the ruling sought?
The judgment was in response to the FMA’s request for a court determination on the eligible investor requirements in respect of an offer of financial products, largely due to a wide variance of market practice on what information is included in the certificate. The FMA has welcomed the clarity the ruling brings to the interpretation of the law.
Key takeaway
The overall takeaway from the ruling is that the eligible investor certification is primarily a self-certification regime, coupled with a confirmation from a financial adviser, qualified statutory accountant or lawyer (each a “confirmer”). The onus is firmly on the investor and the confirmer, and not the offeror of the financial product or the provider of the relevant services.
Key points to note from the court ruling
- A certificate must include the grounds for its certification (i.e., the basis on which the investor has given the certification). Something more than "any grounds whatsoever" is needed, but previous experience in acquiring or disposing of financial products does not need to be expressly disclosed.
- As long as the certificate includes grounds that are not, on their face, incapable of supporting the certification, the requirement for the grounds for the investor’s certification to be stated in the certificate will be met.” Alternatively (more formal): the requirement that the grounds for the investor’s certification be stated in the certificate will be met.
- The Court emphasised the responsibilities of confirmers in confirming the certificate. Confirmers must, having regard to the grounds stated in the certificate, have no reason to believe that the certificate is incorrect, or that further information or investigation is required as to whether the certificate is incorrect. This is a lower threshold than believing on reasonable grounds that the certificate is correct.
- If the grounds stated in the certificate are not incapable of supporting the certification but are “thin,” it is the responsibility of the confirmer (and not the offeror) to ensure it has reached the view that it has no reason to believe that the certificate is incorrect and that no further information or investigation is required as to whether or not the certificate is incorrect.
- Offerors can accept certificates that have been confirmed provided that the certificate contains grounds that are not, on their face, incapable of supporting the investor’s certification and they are satisfied that the certificate meets the formalities required by the FMCA. If a certificate is received which includes grounds that are incapable of supporting the investor’s certification but it has been confirmed, it will be evident from the face of the certificate that the requirement for a confirmation which meets the legislative requirements has not been met and the offeror cannot rely on it.
- If an offeror cannot rely on the eligible investor certificate of an investor who is not otherwise a wholesale investor, the offer must comply with the disclosure requirements for retail offers under the FMCA (unless another exclusion applies).
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.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
