Investing In wine: The Importance Of client protection in an un-regulated world

Investing in Wine: The Importance of Client Protection in an

Unregulated World.

By Patrick Thronton-Smith

Whether we like it or not, investing in wine, along with many other assets including physical gold, land, property, classic cars and art, does not fall under any traditional or recognised regulatory framework. The crypto/digital assets arena does carry some regulatory oversight, but this varies considerably depending on the type of asset and the geographical regulator. Unregulated investments are any products or services marketed as an investment that fall outside these traditional financial regulatory bodies.

While this opening statement may err on the negative, these unregulated investment products have been, and continue to be, for some investors, a perfect way to seek capital growth in conjunction with a large degree of passion for the underlying asset. The art world is one where owners and collectors can wrap their investment into a wider sphere of both personal enjoyment and philanthropic museum lending to a wider audience. Likewise, those who love wine can find value in appreciation, be it capital gain or consumption, typically both.

In the regulated investment world, we have seen an erosion of beneficial features in many instances through political intrusion. Some pension scheme benefits have been curtailed in recent years in the UK. Similarly, buy-to-let properties that were once promoted by governments have undergone significant negative changes, and tax regimes across many countries have made investment returns harder to achieve.

I digress — back to the subject. Firms wishing to enter any unregulated market have a clear choice. With no regulatory oversight, there is no code (apart from a moral one) to protect their customers. Bad things can happen, and a couple of recent wine fraud cases in the press, following some whisky cask disasters, have not exactly been good news for these sectors. As with many investment schemes, there will always be bad actors, and even while these instances are deplorable, the regulated world has not been a paragon of virtue either, if we look at recent PPI and car loan mis-selling to the general public. Those who can recall working in the unregulated "wild west" days of investment banking in the 80s, 90s, and into the noughties now wince at the lack of customer care.

Specifically in the world of wine collection and investment, the vast majority of those involved with taking customers' money in return for cases of wine run a clean ship, with internal procedures embedded and checked to ensure client protection at all times. Even without a regulator and compliance department, wine merchants can build and run a framework where customers can sleep soundly.

Advertising accurate and realistic investment returns, clear and unambiguous "your investment may go down as well as up" messaging, and KYC onboarding questionnaires and documentation are all vital. The process of the investment and the transfer/flow of customer monies needs to be clearly explained. Realistic time frames for purchases and sale proceeds need to be spelt out clearly. The wine merchant's banking facilities, segregated account structures, and independent "four eyes" payment procedures need to be clearly explained before any initial transaction.

Understanding the ownership model of physical wine is paramount, and arguably the most important factor in ensuring that customers are protected. All wine merchants utilise one of the many bonded warehouse networks that support the industry. What is crucial in this part of the business model is the clear ownership and title of the wine. Holding customer assets in a bonded facility, under the umbrella of the wine merchant's name and ownership, means that in a default or administration event, these cases of customers' wine are fully exposed and, in a winding-up situation, will be used as collateral for the merchant, not the customers' investments. As I said, the vast majority of wine merchants have many layers of customer protection, and this can be achieved by giving each customer a "named account" in the bonded warehouse where, effectively, the wine is ring-fenced away from the merchant and therefore fully protected from the merchant's balance sheet.

Traditionally, the En Primeur market, especially in Bordeaux, has been a key part of the wine-growing cycle through to end-consumer consumption. Some call it a wine futures market, where, in essence, the most recent vintage is sold in advance at a locked-in price for future delivery. There is typically an 18–24-month window during which the wine has been paid for but not physically delivered. Trust has always been at the centre of this transaction. The more client-facing merchants have taken this one step further and provide either physical or digital certificates of proof of ownership directly from the negociants, or brokers, who play the most vital part of this transaction cycle.

In summary, until assets like wine fall under a regulatory framework, it is vital that anyone considering investing undertakes thorough due diligence. Those firms with a "customer-first" attitude, and who offer the best protection possible, will be able to provide the most valuable service of all: transparency and safety of their customers' assets.