Central Bank warning over complex investment products

Poor practices include a failure by firms to consider potential difficulties investors may have in understanding complex features of some products

The review found that poor practices put investors at an increased risk.

The Central Bank of Ireland said it has identified a number of poor practices and weaknesses in firms in how they target retail, or non-professional, investors with certain products.

The Bank has now written to a number of investment firms, outlining the findings from a series of targeted reviews they have carried out into Structured Retail Products (SRPs), investment products that are manufactured and distributed by firms. 

The Central Bank said the poor practices and weaknesses include a failure by firms to consider potential difficulties investors may have in understanding the complex features involved in some investment products and failing to present past performance information in a fair and balanced manner. They also said some firms are not including prominent capital at risk warnings in marketing materials.

They said further action is needed by investment firms to ensure their governance keeps pace with an increasingly complex retail investment market so that investors are appropriately protected.

The Central Bank's Director of Consumer Protection, Colm Kincaid, said the retail investment market is changing rapidly, with an increasing shift away from traditional, capital protected products to more complex, capital at-risk products. 

"As complexity increases, so too do the risks to investors and the responsibilities regulated firms have to protect those investors’ best interests," he said. "Our recently published Outlook Report highlighted a number of risks for consumers from changing business practices and ineffective disclosures on investment products, as well as what we expect regulated firms to do to deal with those risks. The work we are publishing today builds on that Report."

Mr Kincaid said they carried out these reviews because they want to see that regulated firms meet high standards in how they design, manufacture and distribute complex investment products to retail investors. 

"In particular, we want to see that complex investment products are designed with real investment needs in mind, that they are targeted only at investors with those needs and that the risks are properly explained. We are requiring firms to take action to improve their performance on each of these fronts, as well as highlighting good practices which we want to see emulated across the sector.”

In the letter to the CEOs, the Central Bank said it is requiring them to take action to improve the quality and transparency of disclosures to investors of the risks relating to these products.

Where complex features are proposed, the firms must consider if they are appropriate for the retail market and whether they are likely to be understood by the target market.

"Care must be taken to avoid presenting an overly-optimistic or unbalanced picture of the likely investor outcomes," the letter states.

They also said Capital at Risk warnings must be in a prominent location in all marketing communications and advertisements.

"The Central Bank expects firms to adhere to high standards of investor protection, acting in the best interests of investors at all times," the bank said.