In New Zealand’s financial system, wholesale investors are treated as a distinct class—presumed to be sophisticated, informed, and financially capable of assessing risk without the protections afforded to retail investors. The regulatory premise is simple: if you’re a wholesale investor, you don’t need the same oversight. But the unfolding reality is far more disturbing.

The Myth of the Sophisticated Investor

Under the Financial Markets Conduct Act 2013 (FMCA), fund managers can raise capital from “wholesale investors” without producing a Product Disclosure Statement (PDS) or being subject to the full suite of investor protections. This exemption is meant to apply only where investors have the financial means or experience to evaluate risk on their own.

In practice, however, this exemption has become a loophole—one exploited by fund managers who operate with minimal scrutiny and little to no oversight. Some schemes have paid out distributions only when new investor capital arrives, temporarily masking the underlying failure of the fund’s investments—behavior eerily reminiscent of Ponzi schemes.

A Recent Wake-Up Call

A recent trust-based wholesale investment fund was finally held to account by regulators after years of operating in ways that fundamentally undermined the very purpose of the wholesale exemption. This included issuing misleading statements about returns, failing to maintain adequate oversight of investments, and managing the fund in a way that prioritized appearances over substance.

While regulatory action eventually occurred, it came too late for many investors, who had already lost substantial sums. The case has sparked renewed questions about whether the wholesale investor framework is fit for purpose—and whether regulators are doing enough to prevent harm.

Where Are the Fit and Proper Checks?

The Companies Office, Financial Service Providers Register (FSPR), and even the FMA often allow individuals with questionable track records to register new funds and operate under wholesale exemptions without undergoing any fit and proper person assessment.

When these operators breach financial rules or act dishonestly, the consequences are often negligible. Rather than being disqualified or barred, many simply resign from one entity and emerge in another, starting fresh with a new investor base. Regulators appear slow to act—reactive instead of proactive—leaving investors to fund costly legal action in the courts, often with little prospect of recovery.

Mortgage Funds: Hidden Risk in Plain Sight

Our investigations into various mortgage-based wholesale funds have uncovered serious concerns. Borrowers are approved with little due diligence, loan-to-value ratios (LVRs) are misrepresented, and valuations are sometimes inflated to justify lending that should never have occurred.

Worse still, when investors seek transparency, they are met with stonewalling, falsified records, or unexplained discrepancies in loan books. In some cases, security documents don’t match what was disclosed, and borrower names are altered post-funding—clear breaches of trust and fiduciary duty.

The Cost of Silence

What’s most troubling is that investors bear the cost of pursuing justice. Instead of regulators stepping in to protect the market, they wait for victims—many of whom are business owners, retirees, or family trusts—to fund legal action from their own pockets.

There is no real deterrent for dishonest operators. In fact, the system enables them to establish new funds, promote new offers, and draw in more “sophisticated” investors while prior victims struggle to recover anything.

Time for Change

If wholesale investors are to be treated as sophisticated, the law must ensure that those running wholesale schemes are equally held to sophisticated standards. That means:

• Mandatory fit and proper person checks for directors and promoters of wholesale funds
• Active monitoring and enforcement, not just post-failure intervention
• Tighter controls around disclosure and investor communication, even for exempt offers
• Criminal and civil penalties that disqualify wrongdoers and deter misconduct

Until these reforms are made, the phrase “sophisticated investor” will remain little more than a legal fiction—used to deny protections to those who are misled, while providing cover for those who exploit the system unchecked.

In today’s market, the question isn’t whether investors are sophisticated. The real question is: are the regulators?