AsiaLIFE

Rapid action by financial authorities and governments in the world’s major economies in the form of stimulus packages has brought the global financial system back from the brink. Stock markets around the world have recovered from the dire levels at the beginning of the year. Nevertheless, after the frightening events of last year, we would not be human if we didn’t have some nagging doubts about the safety of our investments.

Those doubts are understandable, but with the right financial centre, the right product, and the right advice, concerns about losing everything are unlikely to be justified. As ever with investing, it pays to do your homework. Many offshore financial centres offer opportunities for tax-free investment, but not all are equal in terms of the protection they provide.

In the top tier are the Isle of Man, Guernsey and Jersey – regarded as the safest and best regulated in the world. Low-tax financial centres such as Singapore and Hong Kong are highly regarded for their regulatory framework and protection against fraudulent schemes or failed licensed institutions.

There really is no substitute for a sound, transparent but flexible regulatory system that demands good governance and risk management. While most financial centres have varying compensation schemes, they are not always going to return 100 percent of your funds should an investment fail. As the October 2008 collapse of Icelandic bank Kaupthing Singer & Friedlander showed, it can take time to get most of your money back.

The Isle of Man was a pioneer in the field of investment protection under the auspices of the Financial Supervision Commission, established in 1983. In addition to its bank deposit insurance scheme, the Isle of Man's Life Assurance (Compensation of Policyholders) Regulations 1991 ensures that, in the event of failure, up to 90 percent of the liability to the protected policyholder will be met. Hong Kong established the Investor Compensation Company Limited in 2003. This will pay out if you lose on investments due to defaults of licensed intermediaries and authorised financial institutions (capped at HK$150,000). In addition, each securities and futures exchange is required by law to establish and administer a fidelity fund that compensates investors when they are victims of the default or misbehaviour by an exchange member.

While investor protection and compensation schemes are important they are no substitute for protecting you against downside risk and fraud. Make sure you know whom you are dealing with, and that your adviser or agent is licensed by a recognised regulatory authority. Your adviser should understand your own risk profile, while you should realise what you are investing in and its risk profile. Understand the charges, which may be levied, or commission that is being paid on any investment. Find out if there is a compensation scheme to provide some protection in the event that the unthinkable happens and the company or fund with whom you invest goes out of business.

Remember, even the best compensation scheme may not return all your money from a failed investment. As we saw from the catastrophic events of late 2008 it is better to get it right the first time. That’s not always possible but research improves the odds.