ASIC’s advertising guidelines & the real estate loophole

Last month, Australia’s securities regulator ASIC released RG234, a regulatory guide prescribing good practice in the advertising of financial products and advice.

Overall RG234 makes sense. It is important to place parameters around the advertising of products and advice, and there have been too many past examples of aggressively advertised products (from Estate Mortgage onwards) which subsequently resulted in disastrous losses for retail investors.

RG234 covers a lot of ground, but the most important aspects (from our point of view) include:

– Giving a balanced view of risks as well as returns
– Care in using strong claims about a product; ie that it is the “best” or works in a particular way
– Completeness of fees
– Relevance of comparisons; good to see ASIC has used debentures vs bank term deposits as an example, as this has been a problem for many years
– Use of ratings and awards
– Use of pictures and images

It’s not easy to balance the interests of investors, the objectives of marketers, and the oversight of the regulators, so inevitably there remains a lot of subjectivity. ASIC has allowed for this.

However, in addition to terms restricted under the Corporations Act (eg independent), ASIC has highlighted concerns about the use of terms such as “free”, “secure”, and “guaranteed”. The latter are particularly important given they are strong claims which often also figure in relation to comparisons. For example, debentures are generally described as both secure and guaranteed. But if the company issuing the debenture has limited financial strength, then these terms, which have strong resonance with retail investors are pretty much worthless.

The big problem with RG234 is that it only covers “financial products”, so investments not defined as such are excluded. Real estate offers, which often compete with financial products, are not financial products. This is of particular concern as real estate developers and vendors increasingly target SMSFs as a big new sales opportunity, and banks starved of credit growth become increasingly willing to supply finance.

However, this is not just about shonky developers flogging overpriced villas in Queensland. You might equally ask whether some of the claims made by the Defence Housing Authority (DHA) would pass the RG234 test, if it were applied.

DHA is a Commonwealth Government Business Enterprise, which extensively advertises residential investment property to retail investors, including SMSFs. It can be popular because the properties are generally relatively new, lease terms are long (3-12 years), and rents are guaranteed (although there are some qualifications). DHA also maintains the property and makes good at the end of the lease, in exchange for 16.5% of the rent.

So far so good – so long as you pay a fair price for the property (and who are we to judge). However some DHA claims raise questions in light of RG234, including the DHA website home page, claiming: “you can build wealth and gain the peace of mind to enjoy it”, and “It’s one of the most secure property investments available in Australia”. As noted above, use of “secure” is now an advertising term which is of concern to ASIC.

More interesting is DHA’s comments about property prices on the Lease and Rent page: “residential property market cycles in Australia have historically lasted 7 to 10 years—from peak, to slowing, to a flat period and then back to a peak again”. See for yourself at:
http://www.invest.dha.gov.au/dha/home/info/leaseandrent.sok

Right then. Property prices do not fall apparently. This will come as a great surprise to many property owners who have experienced just that recently. The RP-Rismark Index shows a -5% capital return on houses across the five capital cities over the year to February. Leverage would of course magnify this.

Apart from questioning whether a Commonwealth GBE should be making such claims, it provides another reminder that so long as real estate offers remain outside the regulation of financial products, you can drive a large truck through investor protection regulation.