Saturday 16 December 2017

Regulators probe sale of high-risk investment credit notes

The Central Bank headquarters in Dublin
The Central Bank headquarters in Dublin
Charlie Weston

Charlie Weston

THE Central Bank is coming down hard on investment firms that are selling risky and highly complex products to ordinary consumers.

Regulators are concerned that the risks associated with credit-linked notes, a form of derivative, are not being properly explained to ordinary investors.

BCP Asset Management in Dublin, and Wealth Options in Kildare have both admitted that they have been asked by the Central Bank to provide it with more details on their credit-linked notes businesses.

Cork-based investment firm BlackBee, where rugby legend Donal Lenihan is a director, said it had addressed initial requests for information from regulators, but has denied it is involved in any probe by the Central Bank and said it did not sell credit-linked notes to consumers.

BlackBee Investments, which manufactures credit-linked notes, said it does not give advice to retail investors.

Asked if it was being probed by the Central Bank in relation to the sale of credit-linked notes, BlackBee chief executive David O'Shea said: "BlackBee is not under investigation and never has been."

But Mr O'Shea did say his firm has ensured all its literature confirms to guidelines issued by the Central Bank in August.

Fears over the risks associated with credit linked notes prompted Central Bank regulators to order credit unions to stop buying them earlier this year, and German regulators are considering banning their sale to retail investors.

There has been a surge in sales of credit-linked notes as banks are paying little or nothing in interest to depositors.

Some €120m worth of the notes were sold last year, up from virtually nothing the previous year. Some of them offer annual returns of 3.5pc.

Credit-linked notes are highly complex products. They are a form of funded credit derivative. They are structured as a security with an embedded credit default swap.

They offer a means of investing in a borrower's credit risk. The amount of interest and the capital repayment are dependent on the borrower's creditworthiness.

If there is a credit event - such as a delay in paying a dividend by the underlying bank that is part of the investment - then the investor's money is at risk.

However, some firms in this country are marketing these products with claims that the capital is protected, and setting €10,000 minimum investment amounts, seen as low enough to target "unsophisticated" retail investors.

The Central Bank has told a number of investment firms to provide it with more details on the sales process they have for the highly complex investment products, as part of what it calls a risk mitigation programme.

Regulators have ordered a number of firms to change their marketing material to spell out the risks, and to raise the minimum investment amount.

A spokeswoman for the Central Bank said: "The Central Bank has communicated to all relevant firms that it considers credit-linked notes to be particularly complex and risky given the layers of credit risk involved and the potential for a consumer to lose their full investment. The Central Bank has also communicated its concerns that such risks are not being adequately highlighted to consumers."


Dublin-based BCP said the Central Bank had requested more information from it on its credit-linked notes business, after a themed inspection finished.

But it said it had not altered its sales literature.

It said there are multiple warnings on its documents explaining the risks, and its applies a strict "appropriateness test" to those planning to invest.

Senior investment specialist with BCP Adrian Missen said: "BCP has seen significant demand for this product since its launch in 2013 due to persistently low rates being offered to institutional clients by banks and via government bonds." Managing director of Wealth Options in Kildare, Eanna McCloskey, said it does not market its products directly to the public.

"We understand the Central Bank is carrying out a review of the sales process of CLNs (credit-linked notes) and they have asked us for details on the CLNs that we distributed to intermediaries."

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