If you’ve been following Irish financial headlines in recent years, you’ll have seen the names: BlackBee, Custom House Capital, Solar 21 and the latest, Arena Capital. All big stories, and all with painful lessons for investors in unregulated investments in Ireland.
Families, retirees, hard-working savers and of course some speculative wealthy investors saw money they thought was ‘safe’ disappear.
Who should invest in unregulated investments?
What should you do when someone offers you an “exclusive opportunity” that promises “more than your bank account will ever do”?
What fees are charged on your investments in non-regulated investments?
Read on for more information!
Which type of investor invests in non-regulated investment products?
Unregulated products are often marketed to people who are tired of leaving cash in the bank and making next to nothing. The glossy brochures dangle ‘higher return’ And ‘asset-backed security’.
A quote from one I recently reviewed for a client presented to investors; ‘…unique access to a curated portfolio of the best Irish companies with tech capabilities….Join a community focused on making real impact’. Seductive!?
But the reality? Many who invested in unregulated investments (including EII schemes) were not wealthy speculators looking for a thrill.
They were ordinary savers, people who trusted their accountant or financial broker to put them on the right path. Many were aware that there were real risks associated with their investment, but very few probably thought this was real. They wanted their hard-earned money to do a little better.
So why did they take the plunge, and why do people continue to invest in unregulated investments in Ireland to this day?
- Many assumed ‘professional’ advice from their accountant or advisor = safe advice.
- Brokers and accountants who recommend these products are typically heavily incentivized with commissions, so encourage their clients to invest even if they wouldn’t do so with their own money!
- The sales pitch can be persuasive. Glossy brochures, claims of previously successful ‘projects’, potential tax relief on investments, tempting potential annual returns and opportunities to support younger companies to grow by giving them some money!
In short, most investors were not greedy gamblers. They were ordinary people who were a combination of;
a) Looking for a better home for their savings
b) Seeking tax relief
c) Want to invest in Irish companies
d) Transferred/sold a product
What about unregulated products in general?
A few years ago, a client sent us an investment proposal for review that he had received from his accountant/tax advisor.
At first glance it looked attractive; attractive potential return, reassuring language, previous successful projects, the works! But when we started looking into it, it was unregulated and posed a huge risk to the capital invested. We have advised against it. The client stayed out of the way and avoided a collapse that could have wiped out their capital.
That’s the essence of unregulated: no safety net.
- If it doesn’t work, your money is gone.
- No central bank coverage.
- No Ombudsman.
- No Investor compensation scheme. (All regulated investment advisory firms in Ireland pay the Investor Compensation Company DAC (ICCL) each year to fund this body – investors in unregulated products/companies do not have their protection.
The Central Bank has repeatedly warned about this. A 2021 survey found that more than 20% of Irish consumers didn’t even realize that some investments were outside their purview. That is an important knowledge gap, which promoters are keen to exploit.
Some of these products may work just fine. The investors get their tax relief if applicable and get their capital back on time, plus some profit.
But others don’t. And if they don’t, the outcome can be brutal, as we recently read: total loss of capital.
What protective measures should the Central Bank introduce?
Irish households apparently have more than €150 billion in current accounts and deposits. The motives and needs to get this money invested are another day in the making, and Europe is pushing that agenda and pushing Ireland into action, which it is doing slowly.
The key point here is that the low deposit rates of around 1.5-2% per annum at the moment (before DIRT!) makes the owners of these assets suitable targets for promoters of unregulated schemes.
At least the following must be present:
- Clear warnings – think tobacco style labels, with pictures of people with their heads in their hands, or their partners yelling at them for losing their life savings!! Would that work!? But certainly very clear factual statements, such as “If this doesn’t work out, you’ll lose everything and be on your own.”
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- A requirement to print clear examples of similar projects gone wrong, and the practical impact. A similar investment in 2020, where investors invested €100 million, is currently before the courts, where investors are trying to get back a fraction of the capital invested, minus costs.
- Restrictions on who can sell. Regulated financial, accounting and tax firms should not be allowed under Central Bank of Ireland rules to recommend or sell unregulated products in return for pocketing large commissions. It completely clouds the water.
- Transparency about commissions. If your broker or accountant makes €20,000 upfront because you invested €400,000 of your savings in an unregulated fund, you need to know about it! And you should be made aware of this at the proposal stage.
What’s worse, many consultancy firms do not seem to realize that their professional indemnity insurance often does not cover unregulated activities.
That leaves the broker, their staff and their clients exposed.
What would you say to people considering these investments?
Simple rule: if you can’t afford to lose it, don’t put it in an unregulated investment.
That may seem very conservative and unambitious, but it is the mantra I take with them.
Furthermore, I rarely see the need to do them, assuming you have access to a highly diversified and productive, low-cost global equity portfolio, where there is no fear of the return of capital, no fear of the long-term success of the outcome, and no fear of being on your own!
Before you even consider an investment, if you are unsure whether it is regulated or not:
- Check if it is regulated. Unregulated investments are often offered by regulated companies, so the brochure states ‘So-n-So Investment Company Ltd is regulated by the Central Bank of Ireland’ – suggesting the product is also regulated, which may not be the case. So ask whether it is or not. And record that in writing.
- Research the company beyond the brochure. Hard to do but ask around, check CRO for ownership or judgments etc. Check Central Bank of Ireland register etc.
- Ask bluntly about commissions. Find out what it brings them
The costs for non-regulated investments in Ireland?
As with everything investing in Ireland, there is a big difference in what you can pay across the various non-regulated investments in Ireland.
We regularly receive proposals from customers in order to have control over them and support their decision-making. We have nothing to do with these investments. Our standard is to recommend avoiding these, and certainly avoiding any commissions that may be due if someone decides to invest in one of these. That will never change!
We regularly see the proposals that customers receive from accountants or other advisors, or directly from providers.
Two recent cases showed the following ranges;
A 10-year investment, where the money is withdrawn in phases (committed in year 1, with the risk of losing all the money if it does not go through).
The fees were set out very clearly here and an example of an investment of €500,000 was used.
The total compensation over the 10 years amounted to €92,000, i.e. just under 19% of the invested capital.
And given that this was an EIIS fund, which focused on 30% income tax relief, it wasn’t lost on some people that the fees could potentially negate the tax relief element of the investment – which was the main purpose of doing this!?
You can round that total amount to c2% per year. And since there are performance fees if the fund exceeds certain returns (plus return capital), the rate will increase from that point on.
Another had the following format:
Illustrated 5 year investment.
3% placement fee on day 1 of the investment (paid as commission to introducer/broker/accountant)
2% Exit fee on completion of the investment (illustrated at 5 years, but this can be much further depending on the exit etc.).
The total disclosed fee here is c1% per year
Another Private Equity Fund we reviewed:
Fixed management fee 0.75%, plus investment manager fee 0f c1.5%, plus ‘other 0.1%’, plus performance fees of 15% of all performance above 5% per annum.
Here you are looking at rounded c2.5% per year.
Since these are unregulated, capital risk and speculative investments, there is no regulation around fees or disclosures – so this may or may not be the full picture.
Unregulated investments in Ireland; My conclusion?
The collapsed company names change, but the pattern doesn’t seem to.
The promises were the same; higher returns, ‘guarantees’, some kind of asset support. The results all too often rhyme: money gone, little story, lives and pensions that may be turned upside down.
The saddest part? These stories give financial advice a bad name. They make people hesitant to seek guidance at all. While good, regulated advice can really help families plan and protect their future, many people’s views of all of us are tainted, leaving them to lose out.
So the question is: do you want to play dice with your savings? Or would you rather keep your financial plan boring, safe and effective?!
The choice is yours, always remember that!
I hope this helps.
Thank you,
Paddy.
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