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What You Need to Know when Considering an Unregulated Savings Option

Most of us are always looking for ways to save or grow our money. While the majority of Barbadians have accounts at banks, credit unions, and other financial institutions, some people may be drawn to alternative ways of saving or investing, usually in search of higher returns, more convenience, or greater flexibility. These options are often not regulated, however, so it’s important to be aware of the potential risks of using them before committing your hard-earned funds. 

What Are Unregulated Financial Services?

Unregulated financial services are those products and services that are offered by entities that operate outside the oversight of regulatory bodies. The Central Bank of Barbados and the Financial Services Commission (FSC) are Barbados’ two main financial regulators, with the Central Bank responsible for commercial banks and deposit-taking trust and finance companies, and the FSC having oversight for credit unions, insurance companies, mutual funds, and pension funds. 

Why Does Regulation Matter?

As regulators, the Central Bank and the FSC constantly monitor the financial institutions they supervise to ensure that they are complying with the legislation, regulations, and guidelines under which they are licensed. They also conduct regular stress tests, or simulations, to ensure that not only are these entities sound now, but that they would continue to be so even if faced with an unexpected shock (the results of these tests are published annually in the Financial Stability Report).

In addition, the Barbados Deposit Insurance Corporation insures the deposits of clients at commercial banks and deposit-taking trust and finance companies up to $25,000 in the event that something untoward happens. Combined, these institutions provide significant protection for savers and investors. 

No such protection exists for unregulated savings or investment options.

What are the Risks Associated with Unregulated Savings Options?

There is an inherent risk in going with an unregulated option. This is the case even if the product or service is legitimate.

Consider a meeting turn, for example. Meeting turns have been a part of Barbadian culture for as long as most of us can remember. Indeed, many of us know people who, or we ourselves, have used them successfully for years. At the same time, meeting turns rely on trust and require a high-level of honesty from everyone involved because unless each individual fulfils their promise to pay, you might not get back the money you put in. Not only does the person running the meeting have to be reputable and have strict rules in place, the members, some of whom you might not even know, also need to be honourable.

If someone fails to pay their portion, or if the person running the turn proves to be untrustworthy, the other members who lose their money have little recourse. The same is true of other unregulated savings options, which have no oversight and often involve little documentation.

Meeting turns aren’t inherently bad, but they come with an element of risk. Some other unregulated savings options, however, are outright scams. The names they are called and the pitches used to sell you on them vary.

What You Need to Think About 

Regulated savings instruments are a safer option, and one that comes with a measure of protection and a degree of recourse should something go wrong. However, if you’re nevertheless considering an alternative to traditional financial services, here are some things you should do:

  • Look into the reputation and credibility of the individual or entity
  • Make sure the terms and conditions are clear and that you understand them fully
  • Ask yourself if the returns you’re being offered are too good to be true
  • Avoid tying up all your savings in this way
  • Understand how and when you can withdraw your funds and if there are any penalties involved
  • Consider seeking advice from a financial advisor if you’re unsure
  • Think about whether you’re prepared to accept the additional risk that comes with putting your money into such schemes

Unregulated savings options can seem attractive, but they also come with risks that require careful thought. By understanding the key considerations associated with them, you can make informed decisions.

Secure Your Finances

Visit our MoneySmart hub for more articles, videos, and tips on how to secure your finances. Have a specific question you’d like answered? Submit it and it could be answered in our Ask the Expert column.