By Gillian Boyes, Investor Capability Manager
First published by Stuff on 21 January 2020: https://www.stuff.co.nz/business/118942879/know-the-risks-of-unregulated-investments
As you take time to consider your finances for the year ahead – or maybe just spend longer poring over the news – you may have noticed more advertisements promising high investment returns.
These are to be expected in the low interest environment, as people look for better returns.
The Financial Markets Authority's (FMA) research in 2019 found over half of all New Zealanders (56 per cent) are considering making changes to their investments in 2020. A further 43 per cent are likely to put less in term deposits due to low interest rates.
Even if only a fraction of them follow through, that's a lot of money now looking for a new home.
If you're thinking about making some changes, it's important to do some homework beforehand, so you know what you're signing up for. If you don't understand the product, you probably shouldn't invest in it or should seek advice from an expert, like a financial adviser.
There are plenty of get-rich-quick schemes and 'all new' investment opportunities out there for the new decade. If you don't want to get burnt, it's worth remembering the distinction between investments that are regulated, and those that are not.
Generally, a financial investment offer made to you, a 'retail' investor, will be regulated in some way by the FMA.
In some cases, the issuer of the financial product, or the provider of the financial service, will need a licence from the FMA.
Just as you would expect a bus or taxi driver to have met certain standards for their driver's licence, so too must any business offering certain types of financial investments or services before it can get a licence from the FMA.
Licensed investment providers must have appropriate systems in place, their executives undergo tests to ensure they are 'fit and proper' managers of Kiwis' funds and they will also belong to a dispute resolution scheme.
These requirements aren't a one-off hurdle. As the regulator, we can continue to look inside their business and hold them to account for any bad behaviour.
Licensed entities include fund managers (such as KiwiSaver providers and other types of managed investments), peer-to-peer lending providers and people who manage your personal investments for you.
Some offers are not 'regulated' offers, meaning the usual investor protections of our financial markets laws won't apply.
Sometimes these investments are referred to as wholesale offers, aimed at people or firms with significant investing experience or money. Individual investors should avoid wholesale offers unless they are very experienced investors and understand the risks. An offer should clearly disclose if it is a wholesale-only offer.
There's no guarantee you will recover your money if things go south in an investment offer – regulated or not. But firms that make regulated offers, including licensed entities, must comply with all of our financial markets laws which are designed with you, the retail investor, in mind.
Conversely, if a business or financial offer is not regulated and something goes wrong, the enforcement action we can take is limited.
Often, the riskiest financial offers come from overseas businesses who might not be complying with New Zealand law, and you should exercise extreme caution.
The FMA receives thousands of complaints each year from New Zealanders who have lost their hard-earned money to overseas firms, which often end up being scams.
In 2018, New Zealanders lost $33 million to online scams and fraud, according to Netsafe. This was triple the number from 2017.
Of the scam complaints seen by the FMA over the past two years, the three most common subjects were cryptocurrencies, equity offers (a business offering shares) and foreign exchange.
Globally, those most at risk of being targeted by investment scammers are men aged 50-plus because they tend to have more disposable money, and are more prepared to take on investment risk.
Scams are becoming increasingly sophisticated. Scammers go so far as to create fake websites and news articles, making it hard to tell what is genuine. Just over Christmas, a scam involving a convincing fake of a New Zealand news website came to light.
If someone approaches you out of the blue, it's probably a scam. It's generally illegal to sell financial products through a cold call in New Zealand, so ignore them or hang up straight away.
Ask if a financial offer is retail or wholesale' if you're unsure.
Check if the business is licensed by the FMA.
Research the product to understand its opportunities and risks. Make sure you understand it fully. A product disclosure statement provides essential information in clear language.
You may want to consult a financial adviser before investing a large amount of money.
Understand the warning signs of a scam.