Following a recent risk-based surveillance of advertising material, website disclosure and product disclosure statements in respect to managed funds during the COVID-19 pandemic, ASIC has put responsible entities (REs) on notice that their investment fund advertising needs to provide clear, balanced and accurate information. The warning follows corrective action (including in some instances, ceasing to issue interests in the relevant fund) that was required to be taken by seven REs in relation to 13 investment funds (which have approximately $2.5 billion under management).
As part of the surveillance, ASIC found that some REs were providing inadequate information and were not accurately and clearly presenting key features of their investment products. Some of the issues that ASIC was concerned about included:
- unbalanced comparisons of aspects of funds (eg. higher returns), without acknowledging the key differences and risks;
- safety and stability representations which promoted funds having little or no risk of capital loss, when in fact the fund's underlying assets were considerably risky and volatile; and
- withdrawal representations that gave the impression it was easy to withdraw funds on short notice, while the liquidity of the fund did not support this claim.
The fresh warning also comes in the wake of recent proceedings commenced by ASIC. In those proceedings, ASIC has alleged that statements were made that were false, misleading or deceptive by representing that:
- debenture products were comparable to bank term deposits, when they were debenture products with a significantly higher risk profile;
- the principal investment would be repaid at maturity, when investors might not receive capital repayments on maturity at all;
- debenture products were specifically designed for people seeking "certainty and confidence in their investments", when there was a risk investors could lose some or all of their investment; and
- debenture products provided capital growth opportunities, when they did not.
ASIC has also warned issuers about advertising that compares fixed-term investment products to bank term deposits, in which ASIC cautioned issuers that it is monitoring such advertising and the entities involved because of reports about fixed income products being advertised as term deposit ‘alternatives’ or ‘substitutes’, and consumers investing significant sums as a result.
It is clear that appropriate advertising is very much on ASIC's radar as it has recently established a cross-team advertising working group which is focused on:
- looking for advertisements that are misleading or deceptive; and
- looking for advertisements that help ASIC identify products or services which are unsuitable or inappropriate and may be seeking to exploit people in the current environment.
Further, ASIC has stated that it is monitoring advertising of a wide range of products and services across a broad range of media, including social media, using a mix of traditional and innovative regtech monitoring tools.
The current COVID-19 pandemic provides a timely reminder for REs to ensure that promotional materials for their investment funds do not, amongst other things:
- contain statements that are materially false or materially misleading or are likely to induce consumers to apply for financial products in circumstances where the promoter does not care whether the statement is false, or knows, or ought reasonably to have known, that the statement is false;
- induce a person to deal in financial products by publishing a statement that is misleading, false or deceptive or by dishonestly concealing facts;
- reflect conduct in relation to a financial product or service that is misleading or deceptive or is likely to mislead or deceive;
- reflect conduct that is likely to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services; and
- "bait" advertise.
Good practice guidance for advertising materials
REs will also no doubt be familiar with ASIC's guidance in Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guidance (RG 234), which was issued by ASIC shortly after the last global financial crisis. Around the time of issue of RG 234, the then ASIC Commissioner, Peter Kell noted that "a key lesson from the last few years is that a proactive regulatory approach improves market resilience and reduces the risk of investor losses compared to reactive regulation".
RG 234 provides good practice guidance to, relevantly, promoters of financial products and services to help them comply with their legal obligations and to create advertisements which are not misleading or deceptive.
In particular, RG 234 states that comparisons contained in advertising materials should only be made between products that have sufficiently similar features, or where an advertisement compares different products, the differences are made clear in the advertisement. Where only one particular feature of a product is highlighted, a comparison may be misleading if it ignores other key features.
Further, RG 234 notes that for representations regarding safety and stability, the safety and security of a product should never be overstated (for example, few products can claim that they are fully insured or guaranteed). In addition, advertisements should give a balanced message about the returns, features, benefits and risks associated with the product. They should also not overstate the potential benefits or create unrealistic expectations by giving undue prominence to the benefits compared with the risks.
Particularly for withdrawal representations, RG 234 notes that promoters should be mindful that where a product is advertised on the basis of a particular feature or benefit, that feature or benefit should remain available for a reasonable period, given the nature of the market and the nature of the advertisement (section 12DG of the ASIC Act).
While advertising is obviously a very effective tool for engaging with investors, REs need to be mindful that promotional material needs to be accurate (or as ASIC puts it "true to label"). Although such obligations have existed for some time, given the current volatility in the market, and the increasing risks associated with such products, there is a heightened imperative for REs to ensure consumers are not misled or misinformed. In particular, advertising needs to not only accurately represent the actual features of the relevant investment product, but also be accurate throughout differing economic cycles. This, as ASIC notes, is critical when it comes to the investment product’s risk profile, returns and liquidity.