Private investors who once invested their money in the wind power operator Prokon, the financial sales company UmweltDirektInvest (UDI) or in the container provider P+R should at least get unanimous support from this news: Consumer advocates demand a ban on the active sales of such products on basis of a current gray capital market report.
Some of the financial products in question do not require a license from the Federal Financial Supervisory Authority (BaFin), so they are not controlled. This does not guarantee the seriousness and solidity of the providers, nor is it clear how viable the business model actually is. In the case of Prokon, UDI and P+R, the investors had to learn the hard way: they lost the money they invested – the total loss is around 3.38 billion euros.
For this reason, the legislator has already previously restricted the sale of the products: the high-risk products on the gray market can only be advertised on buses – and only with appropriate warnings. So-called blind pool investments, where the specific investment objects are not yet known when the prospectus is created, were also prohibited. But that doesn’t go far enough for consumer advocates. They have long called for an end to the unregulated capital market.
“The scandals have a system in the gray capital market,” says Dorothea Mohn, head of the financial market team at the Federal Association of Consumer Organizations (vzbv). A new report presented by the vzbv on Wednesday supports this statement. Ten of the largest gray wealth providers were surveyed between 2015 and 2020. Among them: P+R with a market share of 33.3 percent, UDI (29.8 percent) and Thomas Lloyd (10.2 percent). The focus was on the financial situation, the publication policy and transparency towards investors. The bottom line: there were no control, information or co-determination rights, which investors are not granted anyway in the case of subordinated loans. The providers also did not shy away from accounting tricks.
The problem also lies simply in the nature of the matter: Investors usually do not acquire ownership of the tangible assets. Your money goes to special units, which pass it on to other companies. The result of this interdependence: opaque costs. “The limited opportunities for investors are often out of proportion to the risks, which can go as far as the total loss of the capital invested,” the report said. Professional investors would not accept such a constellation of numerous investments.
12 key insights
Based on the current investigation, vzbv draws the following conclusions:
1. Instead of assets, investors are offered financial structures such as subordinated loans, where the investors have neither control nor co-determination rights and almost no right to information; claims that are often overdue are rejected without further justification.
2. The relationship between opportunities and risks is questionable: With loan structures, the chances of interest being paid are limited. The losses are at the expense of the investor’s capital. The interest rate is often not sufficient for the risk.
3. The ban on blind pools is ineffective: An economic assessment of the assets is not possible for the investor, because essential assessment criteria such as purchase prices, market values and the size of the rental income are missing. Vzbv mentions various container investments as examples.
4. Questionable construction jump: Although providers had already launched alternative investment funds under the Investment Code, providers then switched back to products under the Investment Act.
5. Current accounts are often not published.
6. The legal requirements for the information for a qualified investment decision are often disregarded (reduced prospectus quality), which prevents a risk assessment.
7. Complexity prevents cost transparency.
8. Accounting is not transparent enough, the exemptions for providers are too generous. The six-month submission deadline is often ignored.
9. Scarce ad hoc obligations: Since 2015, providers must immediately disclose conditions that significantly affect the repayment of investor funds. However, the reports are too vague and too general, which means that investors can hardly assess the situation concretely. Investors cannot properly assess either the causes or extent of the risk of default and the extent of the risk.
10. Auditors’ certificates are unavailable: Investors in subordinated loans cannot influence the appointment. Transparency breaches will not be checked.
11. The responsibility for the prospectus is shifted to the investment company (issuer) itself, even if these are mostly pure special-purpose companies. The content of the sales prospectus is not sufficiently defined. Liability for incorrect sales prospectus is limited to grossly negligent ignorance.
12. The target group selection is insufficient: Since 2015, sales brochures have had to describe the investor target group, but no criteria have been set for this. Investment brokerage without an aptitude test is still allowed. The supervision of financial investment brokers has still not been transferred to BaFin.
Too lax regulation on the part of politicians
Mohn is now calling for a tougher effort from politicians. It must “be an end to the legislative minutiae”. Although the coalition agreement allows for stronger regulation, the statements remain too vague, according to Mohn.
The coalition agreement only says: “We will continue to strengthen BaFin’s competences when we examine investment products.” In addition, BaFin should be tasked with identifying regulatory gaps in the gray capital market. Specific instructions: None. “Politicians must ban the sale of unregulated and therefore risky investments,” she demands. “No advertising, no advice, no mediation,” the paper says.
The consequences for financial advisers and brokers
There are still financial advisers who offer their clients e.g. responsible loans. The reason: Providers of the products entice with very high interest rates. “However, in my opinion, the risk of total failure for advisers and clients is far too high,” says Peter Mattil, a specialist lawyer for banking and capital law in Munich. pro Contra.
If investors who have been defrauded by such a product decide to file a lawsuit, advisers or intermediaries are liable. The anger is initially directed at them, because private investors usually have no direct contact with the providers. “As a consultant, I would think twice before offering such products,” warns Mattil. If consultants do not ask their clients about their experience, risk tolerance and financial circumstances, they can be sued for damages.
Vzbv now demands that incorrect advice on the gray capital market expire after 20 years at the earliest. So far, a statute of limitations often applies before the damage appears, according to the vzbv. If the structural deficits in the gray capital market and in the distribution of the products are not brought under control, further scandals with loss of assets in the billions are inevitable.