Savings and investments

Complex investment products

Do I dare invest in a product I do not really understand?

If you do not understand the key features of a product offered to you, do not invest in it.

Is the name of a product a promise?

The product name does not always reflect the features of the product. Be wary of promises of “high”, “guaranteed”, “hedged” or “absolute” returns.

When is a product so complex that I, as an ordinary saver, should be wary?

The European Securities and Markets Authority (ESMA) has published a warning to investors about complex products, which are increasingly being marketed to ordinary investors. In its warning, ESMA urges caution, for example when a product has the following features:

  • the product is a derivative or incorporates a derivative (a derivative is a financial instrument where the value is based on the value of another financial instrument).
  • the value of the assets or indices determining the value development of the product cannot be easily determined or their prices and values are not publicly available.
  • the investment has a fixed term with, for example, penalties in case of early withdrawal that are not clearly explained.
  • the product uses multiple variables or complex mathematical formulas to determine the investment return.
  • the product includes guarantees or capital protection which are conditional or partial, or which may disappear in certain circumstances.

Security of deposits and investments

How are bank deposits protected?

The Deposit Guarantee Scheme provides protection to depositors in the event that the deposit bank is unable to repay customers’ deposits itself. The maximum amount of cover is EUR 100,000 per customer and per bank.

What is the Investors’ Compensation Fund?

The Investors’ Compensation Fund repays investors’ funds and financial instruments in the event of the service provider’s insolvency. If a Finnish credit institution or investment firm holds a customer’s funds and is unable to repay or return them to the customer, the Fund pays the customer compensation up to a maximum EUR 20,000

How are policyholders protected?

Policyholders do not have a compensation fund that would protect their receivables in the event of the insurance company’s insolvency. Efforts are made to safeguard policyholders’ interests by supervising insurance companies’ financial position.

What kind of protection is there for deposits of foreign banks?

The Deposit Guarantee Fund only provides protection for deposits placed with deposit banks authorised in Finland. Correspondingly, the Investors’ Compensation Fund only covers customer funds and financial instruments held by investment firms authorised in Finland.

Deposits, funds and financial instruments held by branches of foreign deposit banks and investment firms operating in Finland are subject to the guarantee schemes offered in their home member state. The level and scope of protection may vary across EU and EEA countries.

Product Risk of capital loss                                     Convertibility into cash Expenses                              Return (What influences it? What does it consist of?)
Savings accounts The bank is responsible for the capital and interest.
Deposit guarantee EUR 100,000 / customer / bank (* (includes capital and interest).		 Paid on demand, monthly withdrawals usually restricted. Generally no expenses. Return agreed on in advance.

Fixed-term deposits
a) conventional fixed-term deposits
b) equity- or index-linked fixed-term deposits

 The bank is responsible for the capital and interest. Deposit guarantee EUR 100,000 / customer / bank (includes capital and interest (*. The equity- or index-linked return may fall outside the scope of the deposit guarantee. Can usually be transferred or used as collateral without limitations. Termination of contract usually possible.

 Termination of contract usually subject to termination expenses. a) Agreed on in advance.
b) Return depends on the return of a specific underlying asset, subject to market developments. The return may be zero.
Listed shares Significant In principle, easy to convert into cash; market conditions affect the price and tradability. Trading expenses (broker-dependent) and custody expenses.

 Consists of potential capital gain and dividends. Price performance and dividend income depend on market conditions.
Investment funds
a) short-term fixed-income fund
b) long-term fixed-income fund
c) balanced fund
d) equity fund		 Varies by fund type. Easy to convert into cash, redemption procedure is stated in fund rules. Subscription fee, redemption fee and management fee in accordance with fund rules. Fees vary according to fund type. Return on fund units depends on the return of the investments of the fund
Bonds
a) conventional bonds
b) index-linked bonds		 Depends on the issuer:
a) typically very low risk in bonds issued by governments and public sector entities,
b) in corporate bonds, the risk depends on the financial position of the company.		 Possible during the loan term. The counterparty is typically the issuer, who sets the price level. Secondary market may be inactive.

 Trading costs are included in the lower resale value. Subscription fees, premium in connection with subscription and custody fees possible. When held to maturity, the return is as stated in the loan terms. If sold during the term of the loan, return depends, for example, on the interest rate level, which affects the value of bonds. Return on index-linked bonds depends on the performance of the underlying index.
Derivatives
a) securities (warrants)
b) derivatives contracts (options, forwards, futures)		 Significant. The loss on derivatives contracts may in some cases exceed the capital invested. In principle, easy to convert into cash; market conditions affect the price and tradability. Trading expenses and custody expenses. Derivatives contracts may require collateral. The return prospects may be high, but in such a case, the risks are high, too.  The return depends on market developments and selection of risk level.
Investment-linked insurance Risk is present, depending on the underlying investment. Compare with investment funds. Usually minimum savings period of 2 years. Earlier exit possible, subject to additional expenses.
Pension insurance cannot be exited during the contract period.		 Fee structure typically complex, insurance expenses, investment expenses, exit expenses. Depends on underlying investment.
Compare with investment funds.

*) As regards cooperative banks belonging to the amalgamation of cooperative banks, the protection is group-specific