Matthew Horncastle of Williams Corporation in the Auckland office. Photo / Alex Burton
Accountants, lawyers, financial advisers, property developers and funders have welcomed a report from Te Mana Tātai Hokohoko the Financial Markets Authority that reviewed the $300 million-plus wholesale funding sector and issued interventions simultaneously - a first for the Crown agency.
Black Robin Equity and Westwood Terraces BRE, Du Val Capital Partners and Du Val BTR GP, E+O Property Syndication, Jasper NZ Investments, Provincia Property Fund, Williams Corporation Capital Partnership GP and Wolfbrook Capital were all warned.
Chartered Accountants Australia and New Zealand said the investigation meant it was "committed to highlighting the findings to our membership. We look forward to further discussions with the FMA, and our membership, on this issue."
A Law Society spokesman said the authority had indicated it intended to make referrals to it and anything that society received would be considered and processed under the law.
Katrina Shanks, chief executive of professional industry body Financial Advice NZ with 1500 members, said people in her sector would also review what they did.
"The FMA review is really positive. This has uncovered issues that the FMA are concerned about. On the additional guidance provided from the authority, we will take note of that and act on it as an industry.
Eligible investor certificates were important to protect retail clients and ensure they had the skills, knowledge and competency to get a certificate. The feedback provided from the authority highlights instances where the requirements weren't fully met, she said.
The report allowed a review of the law of regulation to ensure that the intended outcomes of that were achieved, she said.
Matthew Horncastle, the co-founder of New Zealand's largest privately owned house builder Williams Corporation, said the review would mean some offers to invest money with his business would be rejected in future.
"We will update our systems and processes after this warning and change what we do. In future, sometimes we will reject offers to invest," he said from Williams' Brisbane office.
Williams has three wholesale funds: Williams Corporation Capital, Williams Corporation Capital Partners and Williams Corporation First Mortgage Investments, he said.
"As of today, $158.8m is in those three funds, put in by 337 investors. All the investors are getting 10 per cent gross per annum, paid quarterly far above the bank rate," Horncastle said.
"That entire sum is invested in developing new houses, which makes us the largest privately owned builder of houses in New Zealand. These funds are critical for our ability to supply affordable housing for Kiwis," he said.
Asked about Horncastle's response, authority acting capital markets director Paul Gregory said: "That's the sort of action we're hoping to prompt and that's part of the reason for making this public as well."
Horncastle said he was wary after a statement from authority chief executive Samantha Barrass about the schemes: "I thought it would be interesting to see what happened."
He defended the way the business had raised money: "We've met all obligations, as outlined in our information memorandums and paid out over $25m of dividends since 2019."
The warning from the authority was for only two of three funds.
"The FMA and ourselves interpreted the legislation differently. What I want to highlight is that the authority didn't ask me to return the money. The issue is around when you have accredited investors, you must have a third party sign off their eligibility saying they know the investors have the ability to assess the risks.
"The FMA is saying we should have declined some of those certificates. We interpreted the legislation that as long as the third party - accountant, lawyer or financial advisor - said that party was competent, we assessed them as competent," Horncastle said.
The investors had willingly wanted to deposit money and their lawyers, accountants or financial advisers said they could, Horncastle said.
"The primary thing that matters is we met all the commitments in our IMs, we built houses and did everything we said we're going to for our investors. But we understand what the FMA saying in their warning and we're going to update our systems."
Paul Gregory said: "We did get feedback there is room for debate about what constitutes appropriate grounds for making an investment. We took that feedback. But where there is no debate is where there is not a certificate, where it has not been signed where it is required to be or where the grounds are wholly inappropriate like 'I've sold farm' or 'I've got a term deposit'."
He hopes offerers carefully consider their use of social media to promote offers and where pre-printed certificates with multiple choice answers are presented to those considering buying into wholesale funds.
Warnings were issued to seven businesses out of 23 that the FMA examined making these offers.
Some in the sector responded more angrily to the authority saying "we're not a f***ing Ponzi scheme. This is anti-business, it's frightening!"
"It's not anti-business," Gregory said. All up, 16 entities out of the 23 had received no warning.
"There are two firsts for the FMA here: completing the review and issuing warnings at the same time. The other unique aspect of these proceedings is it's the first time the FMA had issued this number of public warnings at once. Seven were issued at once in this case," Gregory said.
Kenyon and Charlotte Clarke's Du Val Capital Partners said it got the warning about eligible investor certificates.
"Du Val is reviewing its processes in light of the concerns raised by the FMA and the FMA's views and guidance expressed in the thematic review. Du Val Capital Partners and Du Val BTR GP take their compliance obligations seriously," the statement said.
Jasmine Yao, co-founder of Black Robin, welcomed the authority's "education for wholesale investors". She supported the review but said the business had placed its trust in accountants who signed certificates.
"We thought that chartered accountants would have the knowledge to investigate and consider the potential investor's ability as a wholesale investor, given that they had been tasked with the statutory obligation to sign off the declaration," she said.
Black Robin took all necessary legal advice to ensure compliance.
"We welcome more direction from the FMA and its highlighting of the real need for education in this sector, for not only offerers, but also the professionals that need to ensure investor certificates comply," Yao said.
It was difficult for offerers to query certificates signed by professionals given statutory power, she said.
Highlighting the need for that education by issuing warnings to the property investment sector, when most investors' declarations were validated, could be damaging to the sector's reputation, she said.
James Kellow, director of NZ Mortgages & Securities, welcomed the authority action but he emphasised that the Ponsonby Rd-headquartered business raised no money via the wholesale funds market.
"I think it is excellent that the authority has finally set clear expectations for these products. If there have been any holes previously, the lawyers, accountants and investment advisers working alongside wholesale investors will now know exact requirements when certifying an investor's eligibility," Kellow said.
It is unclear in the announcement if any non-qualifying investors had actually put money into these products and if it needs to be returned.
"But on first reading, it appears not. Wholesale investors with lawyers, accountants and investment advisers' guidance should be savvy operators, understand risk and then be able to pick the best investment," Kellow said.
The seven who got warnings were a diverse mix from small property developers or syndicators through to major home builders.
So risk profiles of each investment would be different. The best offerers of wholesale investment funds will presumably grow and the ones deficient will see their books contract, Kellow said.
House prices will be 20% lower in real terms by the mid-2030s than in 2021.