‘Novel risks’ – Central Bank weighs up tougher rules on sale of unregulated financial products

Brokers may not ‘fully understand or explain’ the schemes they are selling, regulator warns

Central Bank Governor Gabriel Makhlouf. Photo: Steve Humphreys

The Dolphin scheme – now known as German Property Group – which was headquartered in Hanover, Germany collapsed into a complicated liquidation and legal process leaving Irish investors owed more than €100m

Central Bank Governor Gabriel Makhlouf. Photo: Steve Humphreys

The Dolphin scheme – now known as German Property Group – which was headquartered in Hanover, Germany collapsed into a complicated liquidation and legal process leaving Irish investors owed more than €100m

Central Bank Governor Gabriel Makhlouf. Photo: Steve Humphreys

Fearghal O'Connor

February 05 2023 02:30 AM

The Central Bank has warned it is concerned about a “rapid rise” in the amount of unregulated financial products being sold in Ireland.

The financial regulator has warned consumers about “novel risks” of investment products such as loan notes, into which small-time Irish investors have pumped hundreds of millions of euro in recent years.

Before interest rates began to rise, these types of products were often sold by financial brokers around the country as a way for investors to make a higher return than was available to them via other more traditional investment products.

Some unregulated schemes have left Irish investors nursing substantial losses with little comeback

The Central Bank has to date taken a hands-off approach to unregulated financial products even when they were sold by regulated brokers but that now appears to have changed as problems have increasingly emerged with some unregulated schemes that have left Irish investors nursing substantial losses with little comeback.

“The Central Bank of Ireland regulates firms providing investment services under European and Irish law. The law lists the various types of investment services and investment products that must be regulated and so products and services outside this list are outside the protections of the legislation,” a Central Bank spokesperson said in a statement issued to the Sunday Independent.

“We are concerned there are risks for consumers from the rapid rise of the marketing of new types of unregulated financial products. These products bring novel risks that may not be fully understood or properly explained by those marketing them,” the statement said.

The Central Bank would “continue to engage on this topic at a domestic and European level with a view to ensuring the protection of investors given the implications of investing in products that are not covered by financial services legislation,” it said.

“In addition, in our ongoing review of the Consumer Protection Code, we are seeking views on whether there should be additional obligations on firms when they undertake activities that are unregulated.

Where investors are unsure, they should seek independent legal advice

“We would encourage all investors and their professional advisers to be certain they fully understand the investment product and the risks involved before entering into or advising on any financial transaction, particularly when investing in a product that is not covered by financial services legislation. Where investors are unsure, they should seek independent legal advice,” the statement said.

Loan note type investments are often sold by regulated financial brokers on high, sometimes double-digit, commission fees, acting on behalf of a wide range of promoters seeking direct investment for businesses and schemes.

There are no exact figures as to how much money Irish investors have put into such entities but financial sources suggest hundreds of millions has been invested in recent times.

Many such schemes have successfully paid out to investors but there have been high-profile casualties. The Dolphin scheme – now known as German Property Group – has since collapsed into a complicated liquidation and legal process leaving Irish investors owed more than €100m.

Other loan note investment schemes have also run into difficulty in recent times, with at least one, sold by Irish financial brokers, currently delaying repayments to Irish investors.