If you have ever heard of Custom House Capital, Dolphin Trust, or Solar 21, you will know that Unregulated Investments in Ireland are commonplace and contentious.

I’m certainly not an expert on these types of products, but I know enough to realise that I wouldn’t touch unregulated investments with my own money, never-mind someone who trusts me to mind theirs! So this week, I’ll share with you:

• What are Unregulated Investments
• It’s all about the money!
• Do they go wrong?
• How to spot if something is regulated or unregulated
• Why you might consider some alternatives

This piece is being shared based on a suggestion from a long-term podcast listener, so thanks for the prompt!

What Are Unregulated Investments?

I’ve never seen data on it but most investors in Ireland either invest in Insurance company investment products, or in platform-based investment funds from the likes of Dimensional, Vanguard, Blackrock etc etc. If you invest in anything outside those two, you are possibly going to be invested in an unregulated investment scheme! That’s a very simplified view of it, but is applicable to probably 95%+ of all investments in Ireland.

The Central Bank of Ireland is responsible for the authorisation and supervision of investment funds established in Ireland. So, if you are investing in a UCITs fund, for example, that should/would be regulated by the Central Bank of Ireland.

If, on the other hand, you are investing in a product from one of the Insurance companies, that company and the products it sells are regulated by the Central Bank of Ireland.

If you are buying these products or investing in these funds, you may well be doing it via a Financial Advisor, and one whom is also regulated by the Central Bank of Ireland. That advisor must operate in accordance with Central Bank of Ireland rules and code.

A regulated financial advice firm must operate in accordance with Fitness & Probity, Consumer Protection Codes, Data Protection regulations, have appropriate levels of Professional Indemnity Insurance, must file fully Audited Accounts each year, must contribute towards the Investor Compensation Company (ICCL), among many other things! And rightly so.

The trouble for investors is that quite a few of these regulated financial advice firms sell both regulated and unregulated investment products!

Under the Consumer Protection Code (one of the aforementioned codes), regulated firms must ensure that communications to their clients in relation to unregulated products are sent on letterhead and email which does not contain the firm’s regulatory disclosure line about ‘Such and Such Financial Ltd. is regulated by the Central Bank of Ireland’. And, if firms deal in unregulated investments, there must be separate sections for regulated and unregulated activities on their website!

The Central Bank has advised that regulated firms should include a warning in a prominent position on all communications with clients that relate to unregulated products. The warning needs to be both clear about the regulatory status of the product and explicit about what investor protections do not exist on such products. These instructions were communicated to regulated firms in a ‘Dear CEO’ letter from the Head of Consumer Protection, Simon Sloan, a copy of which can be seen here.

The reality is that this may or may not always happen. If you see such products where that is not made clear, communicate it to the Central Bank of Ireland would be a positive thing to help protect others.

It’s All About The Money

Informed Decisions Ltd. is a regulated advice firm, and listed on the Central Bank of Ireland register of authorised firms. Even though we are fully independent and don’t engage in commissions, we still routinely receive unsolicited email and post from unregulated firms promoting unregulated investments.

They offer Informed Decisions up-front commissions of 5-10% of whatever we might get our clients to invest in their latest and “innovative” yoghurt business or solar panel farm! Eh, no thanks. And there have been reports of commissions for introducers of up to 21%!

As I said, if I wouldn’t put my own money into it, I certainly wouldn’t suggest a valued client put theirs into it, no matter what was in it for me. I like to sleep well.

But if you think about it; if we were to decide to flog this stuff, and we convince, say 10 clients that this yoghurt business is a good investment. They invest say €100k each. Even at the lower commission range of 5 to 10%, we stand to receive between €50,000 and €100,000 commissions for convincing our clients to do so.

All we’d have to do is get those clients to fill in an application form, and sit back to watch the cash roll in! You can see how some firms are so motivated to do it. Set aside for a moment that it’s reckless for the client; it’s damn lucrative for the firm!

But it’s also reckless for the advice firm, whether they realise it or not! The Professional Indemnity insurance that a firm must have under Central Bank rules, will potentially cover them if there is an issue with their regulated activity.

However, such P.I insurance will usually not cover advice relating to unregulated investments. So if there is a successful claim by an investor against an advice firm, nobody wins as the directors of the firm could be personally liable for the damages, and the investor could be waiting a long time for restitution. Crazy stuff, really.

Let me be clear here; there is nothing necessarily wrong with investing a slice of your investable assets in a small business. But, if you were to do that, I’d suggest to only do so if you have a firm knowledge of the business, who is running it, what the upside is, and what your stake is; and not to do it through an opaque myriad of intermediaries and unknown parties!

Unregulated Investments Ireland – Do They Go Wrong?

Irrespective of your views of them, we tend only to see and hear about the unregulated investments that go wrong. Some of the most high profile:

• Custom House Capital and their “systemic and deliberate misuse” of €66m of Irish pension holders’ money
• Dolphin Trust property investments “collapsed” with €150m of Irish pension holders’ money
• And the latest, “concerns” over Solar 21 paying back some €250m to Irish Investors from its renewable energy projects

People often think that it is only the very well-off that invested in these sorts of things but that is not the case at all. In most instances, it was individual Brokers who approached their existing regular clients to try get them to invest in these things.

Brokers who are/were driven purely by huge up-front commissions they get when a client moves money from ‘Fund A’, to these types of unregulated investments. And when the product brochure also refers to potentially huge returns, and to changing the planet or some-such nonsense, you can see why innocent and well-meaning investors would go for it.

Read blog 212, Best Investments Ireland, where I recall a personal story about a relative being encouraged to move her funds from one place to another – luckily, we spotted it and called a halt to it in time!

When unregulated investments go wrong, they can go terribly wrong. As in total loss of capital, which is something that has never happened with a well-diversified portfolio of passive global equity, for example!

When they go wrong, there is usually very little that comes back to investors, based on what we have seen in high profile cases in the past decade. We are talking cents in the euro, even after liquidators have dug for every cent on behalf of investors.

You can submit a complaint about an unregulated investment to the provider and the advisor, for all that is worth to you. Indeed, you can bring that complaint to the Financial Services and Pensions Ombudsman (FSPO). However, as the investment was an unregulated investment in this case, they may not be willing or able to deal with the complaint. Hence, if they end up anywhere, these issues end up in Court.

The Investor Compensation Company (ICCL) I mentioned earlier, into which all regulated firms pay an annual Levy, can and does get used to try compensate investors, but again, don’t be expecting to get fully reimbursed. I know of one individual who had gotten involved with Custom House Capital, and the cheque they have been offered from it would barely cover the cost of the postage.

Every case is different, of course, but there is one surefire way of ensuring you don’t get burned on these types of schemes, and it involves not touching them in the first place.

Consider Alternatives

If the reason you might consider an unregulated investment in Ireland was due to the lack of interest on deposit, or the under-performance of something else you are already invested in, perhaps consider if there is a regulated alternative available.

There are a myriad of unregulated investments being sold across the country today, and most of them are themed around renewable energy projects or property related. If you really want to invest in property, could you potentially do that via direct property instead of via an unregulated investment?

If you haven’t sufficient assets to buy a place, could you pool together with others to do so? It’s not something I am a huge fan of, but you can pool your pension or portion of your pension with other pension holders to buy a property etc.

If you want to invest in ‘Green’ projects, there are UCITS/ETF funds that can give you exposure to invest in companies that operate in related industries and projects. Again, one needs to be cautious that they are investing in something that is prudently managed, has fair fees and has a solid probability of being a successful investment, as opposed to simply being regulated!

And finally, if you have money on deposit and are potentially a conservative investor, no matter what sort of ‘Capital Protection’ is being offered on the brochure, you must realise that those guarantees are only as solid as the firm that is providing it, which is not always so firm.

Unregulated Investments Ireland are generally high risk products with huge amount of complexity, to the degree that the advisors selling them often do not fully understand them themselves.

Ultimately, buyer beware, unfortunately. Central Bank of Ireland can’t and won’t ban them, there is nothing illegal about them. You can read Paschal O’Donoghue’s Oireachtas response to a question on all of this last year here. Ultimately, the onus to ensure all disclosures are clear and that only suitable investors get invested in them lies with the people who stand to gain the most from selling them.

I hope this helps – and please do share with anyone you feel might be in a vulnerable position with some of these things, and who could benefit from reading this.

Paddy.