Patrick Francis O’Donnell Fined Over Sale of Non-mainstream Investments
The Financial Services Authority (FSA) has fined Patrick Francis O’Donnell of P3 Wealth Management Limited (P3) £60,000 for advising his clients to invest in Unregulated Collective Investment Schemes (UCIS) and other non-mainstream investments, when these products were clearly unsuitable.
The FSA said O’Donnell did not understand the regulatory restrictions on the promotion of UCIS and failed to promote UCIS compliantly. The FSA has banned O’Donnell from performing any function in relation to any regulated activity in the financial services industry.
Examples of non-mainstream investments include traded life policy investments, wine, crops, unlisted shares and timber. Often investments into these assets are structured as UCIS but they can also take other legal forms such as special purpose vehicles.
These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are actually higher risk investments. The risks they carry are often esoteric and difficult to assess. For example, they may be illiquid, difficult to value and susceptible to catastrophic loss of value. Governance controls can also be weaker than on mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors.
As O’Donnell was the sole director and only approved person working at P3, the FSA has cancelled P3’s permission to carry on regulated activities. P3 was a small independent financial advice firm based in West Lothian, Scotland.
The FSA found that O’Donnell failed to adequately assess whether non-mainstream investments were suitable for his clients and whether his clients were eligible to receive promotions for UCIS under the FSA’s restrictions. Although O’Donnell may have honestly and sincerely believed he was doing his best for his customers, he advised many of them to invest almost all of their wealth in one or more illiquid, complex and higher risk investments.
As a result of his advice, a fork-lift driver and his wife invested the entirety of their known pension funds into UCIS. In an attempt to provide her husband with benefits in the event of her death, a cautious investor put 94% of her known assets into non-mainstream investments. O’Donnell also advised a mother earning a small salary and supporting a dependant son to invest 93% of her known pension in UCIS.
In total, O’Donnell advised 57 of his customers to invest in UCIS, 14 of whom also invested in other non-mainstream investments. From a sample of nine files covering 15 customers, the FSA found that around two thirds of O’Donnell’s customers invested over 75% of their known available funds into UCIS and other non-mainstream investments. O’Donnell’s failings meant that many of his customers received advice that was unlikely to be suitable for them.
Following its visit, the FSA asked P3 to stop selling UCIS. Despite being fully cognisant of the FSA’s concerns, O’Donnell permitted £185,306 of UCIS business to be completed just four days before he confirmed to the FSA that he would stop selling these products. Even after he had confirmed this, O’Donnell nonetheless completed UCIS investment applications on behalf of two of his customers.
Although UCIS are not regulated schemes, their promotion and sale is subject to FSA rules. Authorised firms carrying on regulated activities in relation to UCIS, such as giving a personal recommendation to invest in them, are subject to FSA regulation. UCIS cannot be promoted to the general public in the UK and should only be marketed to certain limited categories of investors, such as sophisticated investors and high net worth individuals.
Tom Spender, head of retail enforcement at the FSA, said: “O’Donnell had absolutely no understanding of the regulatory restrictions in place which prohibit advisers from selling UCIS to the vast majority of UK retail investors. He also completely failed to make recommendations that were suitable for his clients’ individual needs and circumstances.
“Such mis-advice cannot continue. UCIS and other non-mainstream investments are very often high risk, complex products, which are not appropriate for most retail investors. We will continue to intervene where we find mis-selling.”
The FSA has previously taken action against a number of other firms and individuals for failings in relation to UCIS. These include: Rockingham Independent Limited, Stephen Hunt, Jonathan Edwards and Gary Forster, Paul Banfield and Anthony Moss, Best Advice Financial Planning Limited, Specialist Solutions Plc, Perspective Financial Management Limited, Moneywise IFA Limited, Clark Rees LLP and Alpha 2 Omega Limited.