Death, taxes and financial scandals. Some might add never-ending lockdowns to that list of certainties but let’s hope the latter, at least, is wrong.
Of the other three, unfortunately, they seem to keep on coming.
But if it’s hard to avoid firms collapsing or wavering amid tales of wrongdoing or unethical behaviour, investors and savers alike can at least learn something – even if turns out to be an expensive lesson for some.
Beware high commission rates
The subject of commission on the sale of financial products in Ireland has long been a thorny issue. Many have looked for it to be banned, on the grounds that it can influence a financial advisor, and thus act as conflict of interest in the provision of advice. Others argue that without it, there could be a broad cohort of people who would be unable to pay up-front for financial advice, and thus would be excluded from receiving it.
Whatever your view however, it is, at the very least, crucial to be aware of it. And a high rate of commission should ring alarm bells with even the most risk tolerant of investors.
Consider the experience of Irish investors in German property. Promised annual returns of as much as 15 per cent, some 1,800 Irish investors put in excess of €107 million into it through a vehicle known as Dolphin Capital, later known as The German Property Group. Money was raised from investors by way of issuing loan notes, an unregulated product, for the purpose of buying and renovating listed buildings in Germany. But last year the fund collapsed and now investors are at risk of losing their money.
In addition to potentially generous rewards for investors, it also brought with it benefits for those selling the investment, as it’s understood that a commission rate of 7 per cent – and sometimes more – was paid out. As a comparison, commission on a mortgage is typically paid out at a rate of 1 per cent.
Under Central Bank rules, commission paid to those selling financial products must be disclosed; but this refers only to regulated products, not unregulated services such as loan notes.
And it’s not the only high commission product on the market. Earlier this year, Isme warned that small business owners were being targeted by brokers, who were being paid commissions of up to 21 per cent for the sale of some unregulated investment products.
In the absence of regulation then, investors need to ask the advisers themselves about the commission structure. And to consider, if the broker is taking that much out of the investment in commission, how much is going to be left to meet targeted returns?
Deposit protection matters
Yes, nobody wants to pay negative rates on their savings. It seems an egregious move to levy a charge on something which historically has always yielded a return. Particularly in Ireland, where our rates on lending, such as mortgages, are so out of kilter with euro zone norms; after all, why should we pay for savings when we don’t benefit from cheaper loans on the other side?
And yet, consider the experience of German towns who stand to lose up to €500 million due to the collapse of Bremen-based supply chain finance group Greensill Bank.
The bank, whose parent Greensill Capital filed for insolvency earlier this month after losing insurance coverage for its debt repackaging business, has about €3.5 billion in deposits – €3 billion of which are covered under the country's deposit protection scheme, and a further €500 million which aren't.
The latter deposits belong to German municipalities, including the Hesse state capital of Wiesbaden, and aren’t covered by the deposit protection scheme, due to a change back in 2017. But, while public sector deposits aren’t protected at privately-owned banks such as Greensill, they are at savings banks.
So why did the towns choose Greensill? To avoid negative rates of as much as 0.5 per cent. As the treasurer of Wiesbaden told the Financial Times, depositing €200 million with a local savings bank would have cost the town €1 million a year. So instead they opted for Greensill.
Now however, they are coming to rue this decision, as the country’s deposit insurance scheme looks set to step into gear for the insured depositers – but not for them.
In trying to save money, the municipalities have ultimately put millions of euro at risk. The lesson? Negative rates might sting; but in considering where to put your savings, security might trump some charges.
Know your adviser
There’s a phrase in financial services “know your customer”, used for money laundering issues or to identify a potential client’s risk appetite. But when taking advice or looking to invest, “know your adviser” might also be an apposite phrase.
Consider the Central Bank’s recent €4.1 million fine on Davy Stockbrokers due to a conflict of interest in relation to a bond deal back in 2014 . It’s not the only time the broker has taken some questionable actions.
Back in 2014, for example, a case by James Haughey was brought against the firm, arguing that he had come to the broker to trade shares but ended up in contracts for difference – a product with a completely different risk profile.
He ended up making €2 million, but lost €3.5 million, and paid Davy close to €400,000 for its services. The case was complicated by the fact that Davy embarked upon such a risky trading strategy for its client when Mr Haughey was young, mentally impaired, and had entrusted the broker with his inheritance after being orphaned. In the end, the High Court made an award of €2.1 million against Davy.
As this paper reported at the time, the broker’s subsequent statement was “notable for its lack of contrition towards the young man”. Shades of a hastily redrafted email some seven years later perhaps.
But such cases against Davy are far from the only complaints being made; it's just not all of them reach the courts. A cursory glance at decisions from the Financial Ombudsmanreveals numerous instances of mis-selling which have been upheld by the Ombudsman.
Unfortunately, under Irish legislation, it’s not possible to link the financial services provider with the complaint, but you can read who has had the most complaints upheld against them.
In2019, this was Ulster Bank, followed by Irish Life. The latest update is due to be published before the end of this month, and is worth watching out for.
Whether or not a firm’s history is enough for you to take your business elsewhere is up to you to decide; but it should at least be worth considering before you start any relationship.
