Fewer words, but no less risk

17:00, Jun 21 2014

A planned risk warning system for investments would have portrayed the finance companies, most of which collapsed between 2006 and 2010, as low risk, a conference on financial markets law has heard.

The Financial Markets Authority is re-engineering investment offer documents from companies issuing bonds, shares, debentures and funds, in a bid to help investors decide whether or not to invest their hard-earned money.

The market regulator is concerned many current investment statements and prospectuses are grossly long, packed with jargon and complexity, as well as sometimes lacking material information.

Among the proposals is to have managed investments schemes put a measure of past "volatility"- how much their value went up or down - in offer documents.

This is to allow investors to easily compare the risk levels of various investments on offer.

Stephen Jonas, who runs Craigs Investment Partners' KiwiSaver scheme, told the 10th annual Financial Markets Law Conference in Auckland last week that while the volatility measure is reasonable and rational, it is not an indicator of what will happen in the future.


That was particularly true for finance company debentures, which were issued at a face value of $1 each, and the price of which did not move up or down.

This masked the morass of bad lending and risk-taking happening behind the scenes that led to their demise and massive losses of investor capital, he said.

"Take finance company debenture products, the risk would have been low, but the products were flawed," Jonas said.

Consultation on the proposed changes to investment offer documents closed on Friday, so changes are still possible.

The new regime is due to kick in on December 1, and will see investment offerers like fund managers, finance companies, bond issuers and companies coming to market with IPOs, have to give investors shorter, easier to read offer documents.

The FMA said current investment statements and prospectuses often appeared to be treated by issuers as a means of reducing their legal liabilities should they lose investors' money, rather than being designed to be helpful to investors.

A survey in April showed few people read IPO offer documents from cover to cover.

The planned system will be a two-tier system with shorter offer documents for retail investors which will be strictly limited in length in a bid to make them "clear, concise, and effective".

Longer, deeper disclosure - the kind experts and analysts need - will be posted on an electronic public register which is currently being built. Quarterly updates of material information will have to be made on the register, creating a regime similar to the continuous disclosure regime on the NZX sharemarket.

The offer documents for simple managed funds will be no longer than 7200 words, or 12 A4 pages.

For a debt security the length can be 18,000 words or 30 pages.

For an equity issue, it can be 36,000 words or 60 pages.

The FMA said the investment statements and prospectuses of past offers have been in excess of 200 pages.

Word limits will drive some big changes.

Instead of burying the key risks to investors' capital in a massively long list of risks, directors will have to choose the most pertinent risks, and list them in a logical order.

Long, confusing sentences will be out, and the FMA is warning issuers to avoid dull passive language and negative phrasing.

"We will pay you . . ." is preferable to "The company will pay the security holder . . "

And "It is likely that . . " is preferable to "It is not unlikely that . . "

While the FMA expects issuers to stick to word limits, it is flexible about how many pages a document contains, so pictures, diagrams and white space can be used to make documents more attractive and readable.

Another contentious point for the marketing departments of some issuers, including KiwiSaver managers, is the planned prohibition on promoting a fund "on the basis of its short-term returns where those are not consistent with the fund's long-term returns."

That's long been a favourite trick of marketers.


The Financial Markets Authority is so pleased with the periodic disclosure statements for KiwiSaver, that it is going to make them compulsory for all other managed funds.

The PDS regime forces KiwiSaver providers to produce two-page documents once every three months showing key information on each of their KiwiSaver funds in a standardised format.

The aim was to produce simple factsheets investors could use to understand how the fund they were in was operating, its costs, and its performance.

Crucially, they were designed to make it easier for KiwiSavers to compare funds, which it was hoped would create a market that incentivised fund managers to perform, as unhappy investors would find it easier to see how they were doing compared to rivals.

The information enables the likes of the Commission for Financial Literacy and Retirement Income to build tools like the Sorted.org.nz KiwiSaver Fundfinder tool to allow the public to easily compare KiwiSaver funds.

The Financial Markets Law Conference heard that in time all managed funds would have to produce similar quarterly updates.

Sunday Star Times