If you’ve been following Irish financial headlines over the last few 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, hardworking savers, and of course some speculative wealthy investors saw money they thought was 'safe', vanish.

Who should invest in unregulated investments?

What should you do if someone offers you an 'exclusive opportunity' that promises 'more than your bank account ever will'?

What fees will be taken from your investments in Unregulated investments?

Read-on to find out more!

What type of investor invests in Unregulated Investment products?

Unregulated products are often pitched at those tired of leaving cash in the bank, earning next-to-nothing. The glossy brochures dangle 'higher returns' and 'asset-backed security'.

A quote from one I recently reviewed for a client offered investors; '....unique access to a curated portfolio of the best tech-enabled Irish companies....Join a community focused on making a real impact'. Tempting!?

But the reality? Many who investors in unregulated investments (including EII schemes) weren’t wealthy speculators chasing thrills.

They were ordinary savers, people who trusted their accountant or financial broker to put them on the right path. Many were aware that there are real risks associated with their investment, but very few likely thought that was a real thing. 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 recommending these products are typically heavily incentivised with commissions, so encourage their clients to invest, even if they wouldn't do so with their own money!
  
  
• The sales pitch can be convincing. Glossy brochures, claims of previously successful 'projects', potential tax relief on investing, tempting potential annual returns and potential to support younger businesses to grow by giving them some money!
  
  

In short: most investors weren’t greedy gamblers. They were regular people who were a combination of ;

a) Looking for a better home for their savings

b) Seeking some tax relief

c) Wanting to invest in Irish business

d) Cajoled/Sold a product

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What about unregulated products in general?

A few years ago, a client sent us an investment proposal to review which they were sent by their accountant/tax advisor.

On the surface, it looked appealing; attractive potential returns, reassuring language, previous successful projects, the works! But when we dug in, it was unregulated and carried massive risk to capital invested. We advised against it. The client steered clear and avoided a collapse that could have wiped out their capital.

That’s the essence of unregulated: no safety net.

• If it fails, your money is gone.
  
  
• No Central Bank cover.
  
  
• No Ombudsman.
  
  
• No Investor Compensation Scheme. (All regulated investment advisory firms in Ireland pay the Investor Compensation Company DAC (ICCL) every year, to fund this body - investors in unregulated products/firms don't have their protection.
  
  

The Central Bank has warned repeatedly on this. A 2021 survey found over 20% of Irish consumers didn’t even realise some investments fall outside its remit. That’s an important knowledge gap, and one promoters appear happy to exploit.

Some of these products may work out fine. The investors get their tax relief if applicable, get their capital back on time plus some gains.

But others don’t. And when they don’t, the outcome can be brutal as we are reading about recently: total loss of capital.

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What protections should the Central Bank bring in?

Irish households apparently hold over €150 billion in current accounts and deposit savings. It is another days' work on the motives and needs to get these monies invested, and Europe is pushing that agenda and forcing Ireland to act, which it is slowly doing.

Main point here is that low deposit rates of c1.5-2% per annum at present (before DIRT!) make the owners of these assets ripe targets for promoters of unregulated schemes.

At a minimum, there should be:

• Clear warnings – think tobacco-style labels, with photos of people with their head in their hands, or their partners roaring at them for losing their savings!! Would that work!? But ceratinly very clear statements of fact such as 'If this fails, you lose everything, and you’re on your own.'
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• A requirement to print clear examples of similar projects that went wrong, and the practical impact. E.G. A similar investment in 2020, where investors invested €100m, is currently in the courts, where investors are trying to get back a fraction of the capital they invested, less 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 big commissions. It muddies the waters completely.
  
  
• Transparency on commissions. I your broker or accountant earns €20,000 upfront for getting you to invest €400,000 of your savings into an unregulated scheme, you should know about it! And you should be made aware of it at proposal stage.
  
  

What’s worse, many advice firms don’t seem to realise their Professional Indemnity Insurance often doesn’t cover unregulated activity.

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 into an unregulated investment.

That may seem very conservative and unambitious, but it is the mantra I take with them.

Plus, I rarely see the need for doing them, assuming you can access a very well diversified and productive, low-cost global portfolio of equity, where there is no fear about the return of capital, no fear about the long-term success of the outcome, and no fear that you are on your own!

Before you even consider an investment, if in doubt about whether it is regulated or not:

• Check if it’s regulated. Unregulated investments are often offered by Regulated firms, so the brochure will state 'So-n-So Investment Company Ltd is Regulated by the Central Bank of Ireland' - which suggests the product is also regulated, which may not be the case. So ask if it is is or isn't. And get that in writing.
  
  
• Research the company beyond the brochure. Hard to do, but ask around, check CRO for ownership or judgements etc. Check Central Bank of Ireland register etc.
  
  
• Ask bluntly about commissions. Find out what is in it for them
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The Fees on Unregulated Investments in Ireland?

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As with all things in investing in Ireland, there is a large divergence in what you may pay across different unregulated investments in Ireland.

We frequently get sent proposals by clients, to run the rule over them and to aid their decision-making. We have nothing to do with these investments. Our default is to recommend avoiding them, and certainly shun any commissions that may be payable if someone did decide to invest in one of them. That will never change!

So we frequently see the proposals clients are sent by accountants or other advisors, or direct from providers.

Two recent cases showed the following ranges;

A 10 year investment, where funds are phased-into the investment (committed in year 1, at the risk of losing all funds if don't follow thru).

Fees here were very clearly outlined, and used an example of €500,000 investment.

Total fees over the 10 years was €92,000, so just under 19% of the invested capital.

And given that this was an EIIS Fund, which targeted 30% Income Tax Relief, it not lost on some poeple that the fees could possibly wipe out the tax relief element of the investment - which was the main point of doing it!?

You could round that total fee to c2% per year fees. And given there are performance fees if the fund exceeds certain returns (plus returns capital), the fee rate will increase from there.

Another was of the following format:

5 year investment illustrated.

3% Placement fee on day 1 of investment (paid as commission to introducer/broker/accountant)

2% Exit fee on conclusion of the investment (illustrated at 5 years, but that could be much further out depending on exit etc).

Total disclosed fee here is c1% per year

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Another Private Equity Fund we reviewed:

Firm 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 year.

You're looking here at rounded c2.5% per year here.

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Given these are unregulated, capital-at-risk, and speculative investments, there is no regulation around the fees or disclosures - so this may or may not be the full picture.

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Unregulated Investing In Ireland; My Conclusion?

The collapsed firm names change, but the pattern doesn’t appear to.

The promises were the same; higher returns, 'guarantees' in place, some sort of asset backing. The results too often rhyme: money gone, little recourse, lives and retirements potentially upended.

The saddest part? These stories give financial advice a bad name. They make people wary of seeking guidance at all. Even though good, regulated advice can genuinely help families plan and protect their future, many peoples' view of us all is tainted, so they lose out.

So the question is: do you want to roll the dice with your life savings? Or would you rather keep your financial plan boring, safe, and effective?!

The choice is yours, always remember that!

I hope this helps.

Thanks,

Paddy.

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