Guidance on Unregulated Activities
OVER the past number of years, there has been a growth in the sale of unregulated products. Unregulated products can encourage innovation and diversity into markets outside those that are regulated.
These products often offer investors varying investment opportunities, for example, in renewable energy, and sometimes offer substantial returns, however it is important that clients are made fully aware of the significant difference in consumer protections if investing in such products.
The Central Bank of Ireland highlighted in its June 2020 letter to the industry, that where firms engage in both regulated and unregulated activities, there is a significant risk that clients may misunderstand the protections they are afforded when investing in unregulated products.
It also required that firms must ensure they are acting fairly, professionally and in accordance with the best interests of their clients at all times. Brokers Ireland has previously highlighted concerns regarding unregulated products to the Central Bank and has proposed that these products should be regulated as this would ensure protections for consumers.
Such a move would require legislative change. The main concern is that consumers do not fully understand the difference between regulated and unregulated products, especially where the products are similar in nature. Brokers Ireland recently issued guidance outlined below to its members who are proposing to deal in unregulated products with a view to ensuring that where members advise on these products, their clients are fully aware of the differences between regulated and unregulated products.
Regulated / Unregulated Providers
It is vital that members are aware whether the provision of the product is regulated or unregulated. When dealing with a provider a Broker should ask that providers warrant (i) the regulatory status of the firm and (ii) whether the products are regulated (i.e. subject to the regulation of the Central Bank) or not.
Professional Indemnity Insurance (PII)
Most professional indemnity policies for regulated activities will not cover the firm for advising on unregulated activities. Before a Broker contemplates advising on an unregulated product, we advise that the firm check with their PII provider to clarify if the activity will be covered under their policy.
Disclosure
Under the Consumer Protection Code, regulated firms must ensure that any communications to clients in relation to unregulated products are sent on letterhead/email which does not contain the firm’s regulatory disclosure line. If firms operate a website, there must be separate sections for regulated and unregulated activities.
The Central Bank has advised that regulated firms should include a warning in a prominent position on all communications with clients that relate to unregulated products. The warning needs to be both clear about the regulatory status of the product and explicit about what investor protections are lost.
The warning could be in the following format:
Please note that the provision of this product or service does not require licensing, authorisation, or registration with the Central Bank and, as a result, it is not covered by the Central Bank requirements designed to protect consumers or by a statutory scheme.
Investor Compensation Company DAC (ICCL)
Unregulated activity is not covered under the ICCL. If an unregulated company goes out of business and cannot return a client’s investments or money, the ICCL will not compensate these clients.
Financial Services and Pensions Ombudsman The FSPO, in accordance with the Financial Services and Pensions Ombudsman Act 2017, can examine a complaint which arises in connection with the provision or refusal to provide financial services (including information and advice provision) where the provider is a regulated financial service provider.
Each complaint is assessed on its own merits and in relation to its specific and particular circumstances and evidence provided. Therefore, advice of unregulated activity may fall under the remit of the FSPO.
Separation of Regulated and Unregulated Activities
The Central Bank expects it to be clear to a client when a regulated firm is providing unregulated products. The regulated firm should use different letter head, email, different sections on websites and keep all files and communication separate from regulated activities when advising on unregulated activities.
One way to ensure separation between regulated and unregulated activities is to carry out unregulated activities through a separate, unregulated legal entity i.e. you could have two firms: Joe Blogs regulated (ltd) and Joe Blogs unregulated ltd.
If members have any queries in relation to the sale of unregulated products, please contact compliance@brokersireland.ie
