UAE investors caught by $300m scam

A group of UAE investors caught up in a $300 million financial services scam are lobbying the Central Bank to regulate independent financial advisors in the UAE. Is this the right thing to do?

Since financial markets were first invented, unscrupulous operators have been conning investors, and the boom of the past few years has now left quite a few people bust. For these unlucky investors it is probably too late to recover much of their money, and they risk enriching lawyers rather than themselves in the fight to come.

At present few individuals realize that while the UAE Central Bank meticulously keeps a register of IFAs, they do not regulate them or apply standards of conduct. An IFA is either on the register, or off the register, but this is no guarantee to fair and impartial financial advice. And many IFAs continue to operate without being on the register.

Indeed there is no independent watchdog or an ombudsman to complain to about problems with IFAs. In the UK or USA it might be different, but that has not prevented thousands if not millions losing money due to poor advice from IFAs, although it does hamper the more blatant frauds.

AMEInfo attended a recent meeting of the unlucky investors from the UAE who collectively lost around $2 million out of the $300 million that has gone astray. But for legal reasons AMEInfo will not name the fraudulent organization which might decide to use its $300 million in new funds to sue this website.

However, this does seem to have been a particularly unfortunate case, and a very well organized scam - nothing like the gentlemen from Nigeria requesting help with a bank account. Investors showed AMEInfo the well produced brochures, the explicit capital guarantee, certificates from Lloyd's of London (invalid, of course). There was also a distributor network that included some well known bankers, and a top accountancy practice as auditor.

The investment group now plausibly argues that the distributors and IFAs that sold the fund did not carry out due diligence, and were blinded by the high commissions on offer. But perhaps the same should also be said of the investors themselves who saw above average returns and did not ask enough questions about how those returns would be obtained.

Maybe the real lesson is that investors in the UAE, and the Middle East, should be aware of the nature of the market that they are living in. Unregulated means, well, unregulated. Nobody should ever buy an unregulated financial services product unless in very specific circumstances.

The safest way to invest your money is in regulated products supplied by many of the large international, and some of the very good local banks in the region. If you need an IFA to guide you, and they can be very useful people if you don't understand investment basics, then at least insist that they invest in regulated products with a blue-chip financial institution.

Then you can sleep easy at night. Perhaps the UAE Central Bank should do more to monitor the activities of IFAs, but it would not solve the problem entirely. Investors need to exercise due diligence and caution themselves and that is not the business of the Central Bank.