Shut your loophole

If New Zealanders have a love affair with property investments, it's one where government and regulators have acted as pimp.

As well as granting property investment favourable tax treatment, the government has consistently shied away from including real estate spruikers under the same regulatory regime as other financial advisers and product providers.

For example, real estate agents who sell investment properties were originally intended to be caught under the soon-to-be implemented Financial Advisers Act, which carries higher standards of disclosure and tougher punishments for those who operate in the advice arena.

However, due to effective lobbying and a desire to scale down the amount of regulatory work required by the Securities Commission, agents who flog 'investment' properties were exempted from the Act.

Big mistake.

Where there's a loophole, there's a business.

Instead of being able to exercise direct control over the army of real estate agents and their investment propositions, the Securities Commission instead has to resort to issuing warnings such as this one released on Tuesday outlining the risks of "real property proportionate ownership schemes".

Incredibly, these schemes are even exempt for having to issue a full prospectus and are only required to produce a less-rigorous document called an "offeror's statement".

And there are plenty of hooks.

"Someone investing in this type of property syndicate may also be agreeing to share its debts and liabilities, jointly or severally. This means that if the syndicate can't pay its debts or fund repairs, investors may have to make up the shortfall," the Securities Commission notes. "In fact, each investor may be liable for the whole amount. You may end up owing money to the syndicate."

Yeah, that sounds like a risk and not perhaps one a "timid first time investor", as one proportionate property scheme promoter puts it, might want to take.

Everyone who purports to offer investment advice should be caught by the same laws but real estate agents aren't the only ones given an out clause in the Financial Advisers Act - accountants and lawyers, for instance, are exempt if they give investment advice in the course of their regular business.

A story recounted to me today highlighted the danger of this exemption. A couple who sold their home, then let their lawyer invest the money while they waited to purchase a new house. When the money disappeared in a dud fund (maybe a proportionate property scheme), the Law Society could only inform the couple that "there's risk in all investments".

Didn't you know that?

- David Chaplin