Alarm bells over offer documents

Under the current system there is a belief that many people do not read investment statements because they are often several hundreds of pages long. Photo / Thinkstock

Plans to simplify investment paperwork could backfire, warns finance sector group

A regulatory response to the finance company collapses - which would simplify offer documents for new investments - could backfire on the public, the finance-sector industry group has told the Government.

Submissions have closed for the final stages of the Financial Markets Conduct Bill - the first major overhaul of securities law in more than 20 years.

The bill is expected to receive its third reading in Parliament by June and be passed into law this year.

The changes include a move from an investment prospectus to a shorter product disclosure statement (PDS) with a secondary document providing more information to be available through an online register.

But Jim McElwain, executive director of the Institute of Finance Professionals NZ, which has more than 700 members, said he was concerned the approach being taken would result in less valuation information being available to investors.

"We are supportive of the move to make current documents more accessible to investors, however, the proposed approach in our view won't deliver the right outcome.

"The problem is the bill doesn't make it clear what material information should be in the PDS versus the register."

McElwain said anything that was considered to affect a person's decision to invest was material to the document.

"That is a very low threshold. That approach requires voluminous disclosure."

McElwain said his concerns were compounded by the fact that investment product issuers could have civil action taken against them if material information is on the register but not in the PDS.

"It's not a defence to say yes, we didn't talk about it in the PDS because it's in the register."

McElwain said the Government's proposals for the PDS were heavily prescribed right down to the number of pages and font size.

"We will be moving from a principles-based approach to tick-the-box, which could mean you have people saying, 'We would have disclosed it but we ran out of room'," McElwain said.

"The risk is they are too simplified," he said. "Setting out rules of only two pages for this or one page for that is not going to work."

Under the current system there is a belief that many people do not read investment statements because they are often several hundreds of pages long.

McElwain said there was sympathy in the market for that view.

"The way I look at these documents, they are a resource to dip into."

But he said there was a tension because the Government wanted directors to be more accountable but at the same time have less information in their documents.

"There has to be a framework for what is material and what is not. There is nothing in the bill at the moment that provides for that framework."

The new documents are also designed to make investment products more easily compared.

But McElwain said there was a risk in trying to make things more comparable.

"By oversimplifying it can make products seem more similar than is the case. The risk is that some instruments get misfiled."

But Grant Dingle, research and governance spokesman for the New Zealand Shareholders Association, said there was no reason why a simple investment product could not be portrayed on one side of an A4 sheet of paper with more complex products needing more explanation.

Dingle said his group had more concerns about who was treated as a sophisticated investor.

At the moment, in the bill, if investors have over a certain amount of money they won't have to be provided with as much information.

Dingle said his association wanted investors to sign a disclosure document confirming they understood the investment before being considered to be sophisticated.