Consumers sold unsuitable savings products warns Central Bank

Regulator identifies weak product governance around structured retail products

Some investment products being offered here by firms are not suitable for consumers, providing under-par returns and poor governance, the Central Bank of Ireland has warned.

The alert follows a desk-based inspection of 20 investment firms, stockbrokers and credit institutions and a review of so-called structured retail products (SRPs) that are being offered to consumers.

The regulator identified weak product governance arrangements around the development and marketing of SRPs, and said the sale of credit-linked notes to consumers raised “particular concerns”.

The Central Bank said SRPs were not always a suitable alternative for consumers, given their complexity and potential for partial or total loss of investment.


Product types

Its inspection found that 371 SRPs were launched in 2015, consisting mainly of two types of products: deposit-based SRPs and note-based SRPs.

These account for sales of €971 million and are being marketed to consumers as a way of achieving an acceptable rate of return in the current low-interest-rate environment.

The regulator found that there has been a significant move away from the sale of capital-protected, deposit-based products towards more complex, capital-at-risk products.

It said more than half of the SRPs that matured in 2014 and 2015 underperformed compared with State savings available at the time of their launch. Weak product governance arrangements were also identified in a number of firms.

The Central Bank said credit-linked notes were being sold by a small number of firms to consumers and, in some cases, the higher risks associated with such products were not being adequately highlighted.

In addition, various types of SRPs are being marketed as “capital protected” but the level of protection varies depending on the set-up of the product.

Commenting on its findings, Bernard Sheridan, director of consumer protection, said: "It is important that consumers are fully informed about the risks they are taking on and that they receive appropriate advice.

“Not all structured retail products are the same. They can be very complex and risky, and may not be suitable to meet consumers’ needs if they have a low risk appetite. Credit-linked notes are particularly complex and can carry a much higher risk than other products and may not be suitable for most consumers.”

The Central Bank said it was engaging directly with those firms where issues had arisen and it was considering the “appropriate use of its supervisory powers” to address its concerns.

Letter issued

The Central Bank has also issued a letter to all relevant firms, detailing the findings of this inspection together with recommendations to enhance their compliance arrangements.

Tracker bonds were a popular type of SRP a number of years ago. However, the market has now moved towards more complex, capital-at-risk products.

The inspection identified that nine firms are manufacturing structured retail products. Three of these providers accounted for 58 per cent of the market by sales in 2015.

The Central Bank said capital protection and income from credit-linked notes are generally conditional upon the creditworthiness of multiple counterparties, namely an issuer and one or more reference entities. Some 12 per cent of SRPs sold in 2015 were credit-linked notes.

By investing in such a note, the client takes on a role similar to that of a protection seller who provides protection for the risk of a credit event. In return, the client receives payments for assuming the risk of a credit event.

Ciarán Hancock

Ciarán Hancock

Ciarán Hancock is Business Editor of The Irish Times