AFM: High-risk investment objects require intensive supervision

Investors in teak wood and other investment objects still run a great deal of risk. In 2008, the AFM observed that the provision of information to these investors was often insufficient, which meant that investors were unable to make an accurate assessment of the risks they were running. In 2008 and the first half of 2009, the AFM took a total of 46 supervision measures.

The AFM therefore continues to implement intensive supervision of providers of investment objects. The AFM may, if necessary, impose sanctions such as fines or possible withdrawal of the licence. The AFM’s goal is to ensure that providers of investment objects observe the rules more closely.

Great deal of risk when investing in investment objects
A great deal of risk is involved in investing in teak wood and other investment objects. Not only because of the 'foreign risk' (the plantations are often located abroad which means that supervision is nearly impossible), but also because of the often very long terms involved (often twenty years or longer) and the fact that premature termination is not, or hardly, possible. Moreover, these investment objects do not fall under the prudential supervision of De Nederlandsche Bank. The high risk involved means that it is of extra importance that sufficient information is available to the investor.

Intensive supervision remains necessary
In 2008, the AFM observed that information is often unavailable and/or not in order in the market for providers of investment objects. The information in the prospectuses was often incomplete, the returns presented in Financial Information Leaflets was often incorrect and the audited annual figures were not available, or only available to investors at a very late stage. The AFM therefore had to invest a great deal of effort in 2008 and at the start of 2009 to ensure that providers of investment objects provided investors with timely and accurate information about the risks, costs and expected returns.

In addition to continuous attention for the provision of information to investors, the AFM will also, in the months to come, focus on the manner in which investment objects are sold, and on the advice provided in respect of these investment objects. Transparency of commissions will also be included in this process.

There are two categories within the group of investment objects. Firstly, there are the providers and mediators with a licence from the AFM, and, secondly, there are institutions whose licence application has been rejected. Those institutions are not allowed to manage existing contracts without a licence and are required to draw up a wind-up settlement plan.

IN 2008, the AFM took enforcement action on nineteen occasions. This led to fifteen formal supervision measures, including instructions, orders for incremental penalty payments and the appointment of receivers or trustees. During the first half of 2009, the AFM took enforcement action on twenty-seven occasions, and had to implement eleven measures as regards all providers of teak investments.

AFM research shows that 60% of investors in investment objects invest in such investment objects out of ethical or environmental considerations. Only twenty-five percent of investors in investment object indicate that they are (very) familiar with the area of investment.
Research also showed that consumers view the high risks and the lack of faith in the providers of investment objects as the most important reason for not investing in investment objects.
In addition, twenty-eight percent of investors in investment objects borrowed money to invest in the investment objects. This is remarkable, in view of the fact that a high risk is involved in investing in investment objects. Investing borrowed money further increases this risk.
In addition to teak investments, real estate and agricultural grounds are also offered to the investing public as investment objects

The majority of the forty-four licence applications received by the AFM in 2006 were rejected. Nine providers currently hold a licence, six of which are allowed to actively sell new investments. Following completion of the licensing process, the AFM pointed out that there are various imperfections in a large part of the teak investments. A licence from the AFM only relates to the reliability and expertise of the policy-maker, the honesty and the transparency of the controlled business operations and the organisational structure, and does not remove the risks inherent in investing in teak.

The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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