On 8 September 2022, the Australian Securities and Investments Commission (ASIC) has reported on its surveillance of responsible entities and fund managers for false or misleading representations about investment performance.

Background

ASIC’s managed funds surveillance is the successor to ASIC’s ‘True to Label’ initiative whereby, ASIC originally commenced monitoring of the industry for concerns that fund names did not align or accurately correspond to, the underlying assets and characteristics of the fund.

From October 2021, ASIC commenced its current initiative in taking a broader analysis of performance and risk representations in the marketing material disseminated by funds across the Australian jurisdiction.

Recent surveillance

ASIC’s recent surveillance has reported that thirteen responsible entities or trustees of unregistered managed investment schemes have voluntarily amended or arranged for their respective investment managers to amend, their marketing practices and materials as a result of ASIC’s inquiries. The funds in question, which house a broad range of underlying assets and investment strategies together held approximately $1.4 billion in assets under management. The amendments made and ASIC’s report do not constitute an admission of guilt or a finding of a contravention of statutory provisions by a relevant Court or ASIC.

The regulator’s concerns mainly centred around inadequate warnings regarding past or future returns, comparisons between risk levels of products, and understating the risks of investment when compared to the benefits of the funds.

ASIC’s expectations

ASIC’ expectations in this regard are that marketing material must:

• give balanced messages about returns, benefits and risks;
• give clear and prominent risk disclosures;
• not overstate the reliability, security or safety of an investment;
• compare products appropriately (e.g. term deposits shouldn’t be seen as comparable in terms of risk levels to leveraged derivatives);
• disclose the risks of reliance on past performance as an indicator of future returns; and
• take care with the use of imagery and graphs to ensure they do not confuse the end user.

ASIC Deputy Commissioner Karen Chester stated that ‘our primary concern is retail investors and potentially unsophisticated wholesale investors, especially retirees, making important investment decisions based on marketing that does not accurately represent fund performance.’

Key takeaways

As always, misleading and deceptive conduct within the financial services industry remains a priority enforcement action for ASIC. Responsible entities, trustees of unregistered schemes and investment managers, and all other financial services providers for that matter, must be vigilant in the review process prior to the dissemination of marketing material.

An array of statutory provisions exist in both the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth) to outlaw such conduct. Some of these provisions are in fact ‘offence’ provisions of strict liability, which makes a business liable to criminal prosecution even when they did not intend to mislead, deceive or make false representations. Under section 912D(4) of the Corporations Act, breaches of misleading and deceptive conduct laws by Australian Financial Services Licence or Australian Credit Licence holders will also trigger requirements to submit ‘reportable situation’ to ASIC.

Further, it also cannot be overstated, that ASIC is equally concerned with unsophisticated wholesale investors as it is retail clients. As such, financial services businesses should pay careful attention to wholesale clients who solely meet the statutory income or wealth tests, when they may still lack sound knowledge of the risks of their investment.

The above post is merely general commentary and is not legal advice.