Financial firms are putting customer money at risk by investing it in overly complex products that their customers don’t fully understand, the central bank has warned.
The regulator has written to companies selling so-called structured retail products, ordering them to tighten customer protections by issuing clearer warnings about the risks associated with the investments.
The “Dear CEO” letters followed a detailed review that found that structured investing was becoming more complex, but companies were not updating their disclosures to reflect this.
The central bank found that financial firms did not take into account the difficulties investors might have in understanding the characteristics associated with the products. It was also found that information about performance and capital risk was not presented in a fair and balanced manner in marketing materials.
“The retail investment market is changing rapidly, with an increasing shift away from traditional, capital-protected products to more complex, capital-at-risk products,” said Colm Kincaid, the central bank’s consumer protection director.
“As complexity increases, so do the risks for investors and the responsibilities of regulated entities to protect the best interests of those investors. We want to see that complex investment products are designed with real investment needs in mind, that they are only targeted at investors with those needs, and that the risks are properly explained.”
Structured products are investment vehicles that use a tailored mix of financial instruments to achieve a specific investment objective, typically a specific percentage return over the life of the investment.
Unlike with a direct investment, the customer usually does not own an underlying security. Instead, a structured product uses derivatives, such as options, that deliver a known financial outcome under defined conditions. They are issued by investment banks and distributed through retail banks, wealth managers and other investment firms.
Structured products have gained popularity in recent years as an alternative to cash deposits that have provided very little returns. Customers with large amounts of capital have even been burdened with negative interest in recent years.
However, the investments carry a higher risk than cash and require a higher level of information to be communicated to clients.
The central bank said it now expects investment firms to raise their standards in this area and will monitor developments in the retail investment market through supervisory inspections.
https://www.independent.ie/business/irish/central-bank-warns-finance-firms-about-selling-risky-complex-products-41578940.html The central bank warns financial firms against selling risky complex products