New law may hurt unwary investors
A new law which puts investors with $500,000 to invest on the same footing as banks or professionals ensures Kiwis will continue to be caught up in schemes such as Ross Asset Management, warns the New Zealand Shareholders Association.
The Financial Markets Conduct Bill, progressing through Parliament, was "critical to restoring investor confidence in New Zealand's financial markets", Commerce Minister Craig Foss said in September.
However, a clause treating anyone with $500,000 or more to invest in a single chunk as a wholesale investor has been branded "ridiculous" by Shareholders Association chairman John Hawkins.
The wholesale definition means those with $500,000 would not necessarily be afforded the same disclosure protections as "retail" or "mum and dad" investors, because they are in the same category as investment professionals as well as banks and government departments.
People offering investment products would not be forced to tell budding investors, for example, that their business was not the subject of professional audit, which, the association said, needed to be remedied.
"The fact that you're investing $500,000 doesn't mean you know a blind thing about investing," Hawkins said.
The average Ross Asset Management client believed they had more than $500,000 being managed for them by the time its offices were raided by the Financial Markets Authority on October 31.
Ross, based in Wellington's The Terrace, was placed in receivership last week, with investors warned they might get only 2 to 3 cents in the dollar from what might be New Zealand's largest Ponzi scheme.
Founder David Ross was never audited because he claimed to offer only financial advice rather than financial products.
Sue Brown, the authority's head of primary regulation, agreed having $500,000 to invest did not necessarily make an investor savvy, with some people receiving ACC payouts potentially falling into that category.
Hawkins said Ross's not being forced to disclose to investors that lack of professional oversight of his scheme could be "part of the problem", with clients apparently not suspicious about his above-average returns.
"If you've got to put something down in writing, that will sound alarm bells for people. If you don't have to put anything like that down in writing, who would know?"
The problem would become more serious in the future as retirees withdrew lump sums from KiwiSaver accounts, Hawkins said.