Investment products sold on the unregulated market attract their share of customers. In order to find out more about these customers, BaFin conducted a large-scale study on investment behaviour in this market segment (see info box "Study on the unregulated capital market"). The study revealed that products sold on the unregulated market are more popular among investors with higher incomes than average earners. And customers that invest in the unregulated market were more likely to be saving for their grandchildren than gambling on the capital market.

While the study provided some surprising insights about the goals and expectations of customers that invest in the unregulated market, the products themselves remain a risky and speculative form of investment (see info box "What exactly is the unregulated capital market?”). Investors must expect high losses, and may even lose all of the funds they invest.

Losses on direct investments

The survey showed that investment products such as shares (39%), bonds (14%), structured notes (13%), Pfandbriefe (11%), warrants (9%) and profit participation certificates (5%) are much more in demand than products sold on the unregulated capital market (see Figure 1). However, 4.5% of all survey participants had purchased a product on the unregulated capital market in the past – primarily equity holdings (3.2%) and direct investments (1%). Many of these investments came at a high cost. For example, 22% said they had already lost money through investing in equity holdings. Among investors with experience of direct investments, as many as 50% had suffered a financial loss.

Figure 1: Have you purchased any of the following financial products in the past?

BaFin, Psyma Research + Consulting GmbH

In contrast, for 46% of the respondents, the return on the last product they purchased on the unregulated market was as expected, whilst for 29% of respondents, their expectations were met in part. 16% were disappointed with the return. 9% were unable to assess the development at the time of the survey.

Why do investors buy products on the unregulated capital market?

The participants who had already purchased products on the unregulated capital market described what motivated them to make their most recent investment and what they expected from these products. The most frequent reason for purchasing products on the unregulated capital market was the expectation of high returns (44%), followed by the security of the investments (41%). 22% reported that they intended to reinvest assets, whilst 50% of investors sought financial security in general. 30% bought products on the unregulated market with the intention of strengthening their own pension provision. 25% did not have themselves in mind, but invested their assets for the benefit of others, such as children or grandchildren. Pure speculation was named by relatively few participants as the reason for their investment (18%).

Limited understanding of the market segment

The group of respondents who invested in products on the unregulated market assessed one of the main risks associated with this market segment – the loss of substantial amounts of money with speculative products – as relatively low. Only 36% of them rated the risk of loss as "high", compared to 41% among those who only purchased other financial products (see Figure 2).

Figure 2: To what extent do you think the following statements regarding the investment products listed generally apply?

BaFin, Psyma Research + Consulting GmbH

The research institute also asked customers who had invested in the unregulated market to what extent they viewed their investment as long-term. An investment in the unregulated capital market usually involves a long-term commitment of capital. 49% of customers who had invested in products on the unregulated market were aware of this. The situation was different for those who had only purchased other financial products: only 33 percent of them believed investors in the unregulated market were tied to a long-term commitment of capital.

6% of customers invested almost exclusively in the unregulated market

Those participants who invested in the unregulated capital market were also asked how much of their invested assets at present were invested in products from the unregulated market. For around 6% of respondents, 75% or more of their investments were in the unregulated market (see Figure 3). For a further 7%, 50% of invested assets were invested in unregulated market products. In contrast, almost half of the customers who invested in the unregulated market (49%) held open the possibility of more widely diversifying their assets: only between 5 and 10% of their investments were in unregulated market products. Between these two extremes, a group of 20% of respondents reported that 25% of their investments were in the unregulated market.

Figure 3: What percentage of your invested assets at present are invested in the investment products listed?

BaFin, Psyma Research + Consulting GmbH

The survey also showed that higher earners are more likely to invest in unregulated capital market products. In the category of respondents with a monthly household net income of up to 2,000 euros, only around 2.4% had purchased a product on the unregulated capital market in the past. In contrast, among those with a household net income of at least 4,500 euros per month, this figure rose to 8.3%.

Direct sales most prevalent

When asked about the distribution channel, 40% of investors responded that they had purchased products directly from the distributor online. A further 8% had bought products via an online portal. 32% had purchased products from banks, and 14% from independent advisers.

Asked about who had brought their attention to the last product they had purchased on the unregulated market, 35% responded that they had learned about the investment from a friend, family member or acquaintance. In this respect, personal relationships thus play a greater role than banks (22%) and independent advisers (19%).

BaFin’s perspective

BaFin advises consumers to carefully research which types of products would offer an appropriate investment and whom they can trust with their money. Unregulated capital market products are often very complex, their opportunities and risks are not easy to discern. For offers with a prospectus or product information sheet, investors should read these documents very carefully. Providers must indicate in these documents the material risks associated with the investment. A database created by BaFin provides information with regard to whether a brochure or an information sheet is available for an offer.

But caution is advised: approval for a prospectus or product information sheet does not mean that BaFin has examined the accuracy of the documents. That is not BaFin’s responsibility. The supervisor also does not review whether an issuer is trustworthy, nor does it monitor the products themselves.

Unregulated market products are also very risky because investors often have to commit their money to an investment for a long period of time. Withdrawing from an investment early, if the investor needs capital in the short term, for example, is often either not possible or entails significant price reductions. Investors should also bear in mind that they could lose all their invested assets with such risky and speculative investments.