The red flags of unregulated investment


Deep dive into regulated investment vehicles

On the back of the recent BHI Trust scandal, which has rocked the investment world and realised billions of rand lost, we look at some of the investment signs that investors should take caution of and look at some of the safeguards investors should consider when choosing a financial product or investment. Notably, the distinction between regulated and unregulated options becomes increasingly apparent.



The crucial role of financial regulators

Firstly, it’s important to note that investing in a regulated vehicle means placing your trust in a system that operates within a framework established by authoritative bodies. These bodies design the rules and regulations to warrant that the investment vehicle operates with integrity, transparency, and accountability.

But, perhaps the most significant advantage of regulated vehicles is the emphasis on investor protection. These regulations are crafted to safeguard investors from fraudulent activities and unfair practices, providing a safety net that is absent in unregulated vehicles.

Financial regulators are the watchmen of the financial markets. They are there to ensure that the entities under their purview adhere to the established regulations and operate in the best interest of their investors.

The regulations governing these investment vehicles cover a vast array of aspects, from the qualifications of the fund managers to the methods of reporting financial performance. Regular audits and mandatory disclosures ensure that regulated vehicles operate under the veil of transparency, offering investors a clear view of their investment’s health and activities.

In South Africa, the Financial Sector Conduct Authority (FSCA) forms the backbone of our regulatory authority within the financial sector. Its oversight extends to a broad spectrum of institutions, including banks, insurance entities, retirement funds, and market infrastructures. Its mission is to ensure that market participants conduct themselves fairly and transparently, thereby upholding the overarching goal of consumer protection and maintaining the equilibrium of the financial landscape.

The unregulated investment vehicle: A risky frontier

Many investment vehicles and so-called investment “professionals” are not regulated and, therefore, do not fall within the scope of the FSCA or any regulatory body. In essence, an unregulated investment refers to a financial product, provider, or asset that is not subject to the oversight of regulatory bodies that govern the financial markets. This means they do not offer the same level of investor protection as regulated products.

While the allure of potentially higher returns may draw investors towards unregulated investment vehicles, the risks associated are substantially higher.

The absence of regulatory oversight can often lead to a lack of transparency and a much higher vulnerability to fraudulent activities.

Unregulated investment vehicles often lure investors with the promise of higher returns. However, these returns come with a price: a higher risk profile. Without regulatory oversight, these vehicles can engage in risky investment strategies that may not align with the investor’s risk appetite. Some investors may be drawn to unregulated vehicles due to the privacy they offer. However, this privacy comes at the cost of transparency. Without the obligation to disclose financial information publicly, investors may find themselves in the dark about the actual state of their investments.

Identifying the red flags of unregulated schemes

Investors must be vigilant and able to identify the warning signs of unregulated investment schemes. These red flags can be subtle, but recognising them is crucial to safeguard your investments. Five common red flags are highlighted below:

  • Unrealistic promises: Any investment opportunity that promises high returns with little to no risk should raise immediate concerns. The adage “If it seems too good to be true, it probably is” holds especially true in the realm of investments.
  • Vagueness and complexity: Unregulated schemes often use complex structures and vague details to obscure their operations. A lack of clear, straightforward information should signal investors to proceed cautiously.
  • Pressure tactics: Unregulated schemes may employ high-pressure tactics to push investors into making quick decisions. A reputable investment vehicle will allow you the time to conduct due diligence and make an informed decision.
  • Unregistered sellers: Individuals or companies selling investments should be registered with the relevant financial authority (such as the FSCA). A red flag is raised when sellers and their products are not registered or affiliated with any regulatory body, suggesting there is no oversight or accountability.
  • Complex or unclear fee structures: When investment schemes have complicated fee structures that are difficult to understand or are not openly disclosed, this can indicate hidden costs that will eat into returns or even suggest that the scheme is siphoning funds inappropriately.

Thankfully, as an investor, there are steps that you can take to ensure that your investment is regulated.

  • Due diligence: Your first line of defence

Conducting due diligence is not merely a step in the investment process; it is your first line of defence against falling into the trap of unregulated schemes.

The first step in due diligence is to verify the regulatory status of the investment vehicle. This information is usually available on the website of the financial regulator or by directly contacting them.



  • Scrutinising track records

A thorough examination of the track record of the firm managing the investment vehicle can reveal a wealth of information. Look for consistency, resilience, and adherence to ethical practices.

  • Seeking professional advice

When in doubt, seek professional advice. Regulated firms with qualified professionals can provide you with the insights and guidance you need to make informed investment decisions.

  • In retrospect: Learning from past missteps

History’s threads are often woven in familiar patterns, revealing that the lessons of the past echo in the halls of the future. The recent debacle with the BHI investment scheme, which defrauded investors out of an estimated R2.7 billion, serves as a stark warning of the perils associated with unregulated investment opportunities.

In a similar narrative, in 2021, when cryptocurrency regulation in South Africa was still emerging, the Africrypt incident unfolded. The Cajee brothers, operators of the said cryptocurrency investment platform based in South Africa, were accused of absconding with $3.6 billion (R54 billion) worth of bitcoin.

As reported by Reuters, the FSCA’s head of enforcement, Gerhard van Deventer, acknowledged the regulatory gaps, stating that cryptocurrencies were not yet classified as financial products, thus excluding the FSCA from its regulatory boundary. “We are in the process of bringing crypto into the regulatory fold,” van Deventer indicated (Cocks, 2021).

These cases serve as sobering warnings, highlighting the dire consequences of overlooking the importance of regulatory oversight and due diligence.

Conclusion: Safeguarding your financial future

Unregulated investments encompass many assets, from commodities and private equity to cryptocurrencies and certain types of real estate transactions. While these investments may promise higher returns, they can carry a substantially higher degree of risk, including a lack of transparency, reduced liquidity, and potential for complete capital loss.

In an ever-evolving financial landscape, staying informed and exercising due diligence are paramount. By understanding the crucial role of financial regulators, recognising the red flags of unregulated schemes, and choosing to invest through trusted institutions, you can safeguard your financial future.

The protection, transparency, and stability offered by regulated vehicles, coupled with the guidance of reputable financial institutions like Paragon Wealth Managers, provide a secure foundation for your financial aspirations. For those who seek further insights and guidance, Paragon Wealth Managers stands ready to assist. For more insights, visit us here.



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