FSA Proposes to Ban UCIS from Ordinary Investors

Jack Humphrey, Regulatory journalist
August 23, 2012 /

The Financial Services Authority (FSA) is proposing to ban the promotion of Unregulated Collective Investment Schemes (UCIS) and similar products to ordinary retail investors in the UK.

The proposals require UCIS promotions to be generally restricted to sophisticated investors and high net worth individuals for whom the products are more likely to be suitable. These investors have an annual income of more than £100,000 or investable net assets of more than £250,000.

UCIS are collective investment schemes that are not subject to the rules they would have to follow if they were classed as a regulated collective investment scheme. These rules govern, for instance, investment and borrowing powers, disclosure of fees and charges, management of conflicts of interest, a prudent spread of risk and other investor safeguards.

While this leaves the investment operators greater liberty to pursue new or unorthodox investment strategies, it also means investors generally place their capital at greater risk than would be the case for more mainstream investments.

Currently, UCIS can be promoted to ordinary retail investors after an adviser’s assessment of the product’s suitability. In effect, the proposed rules should prevent firms from marketing UCIS to ordinary retail customers, even in the context of financial advice.

The consultation paper follows on from extensive work undertaken by the FSA, which found that only one in every four advised sales of UCIS to retail customers were suitable, taking into account the customer’s needs and requirements. The FSA found that many promotions breach the restrictions and only a minority of advice is suitable.

Certain other products can carry similar risks to UCIS but are not currently subject to the same marketing restrictions and can be widely promoted in the retail market. In this consultation, the FSA proposes to introduce new rules for them to create a level playing field and improve standards of consumer protection.

The FSA said high levels of unsuitable advice it has uncovered were threatening customers. Examples include pensioners being advised to invest all of their wealth in a single, illiquid UCIS with a view to generating income; and a customer advised to borrow money to invest in UCIS and service the debt with withdrawals from that investment.

A number of non-mainstream pooled investments have failed completely in recent years, leading to total investment loss for customers.

Gavin Stewart, acting director of policy, risk and research at the FSA said: “Product risks can be much greater on UCIS and similar products than on more mainstream investments and we have found that the majority of retail promotions and sales fall a long way short of our existing standards.

“This is important because it is exposing ordinary investors, for most of whom these products are clearly unsuitable, to significant potential for large losses on what are often esoteric and illiquid investments. This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future.

“We estimate that the UCIS retail market is worth around £2.5 billion in the UK. A total of 85,000 ordinary retail investors have direct holdings in these investments, which can hold assets like traded life policy investments, fine wines, crops and timber.

“Another £1.5 billion is invested in products, such as securities issued by special purpose vehicles, which can carry similar risks for investors. Under our proposals, firms should only promote these products to people for whom a UCIS or similar product is more likely to be right.

“While we have found problems with a number of sales, we are not saying that all existing investments were mis-sold. Existing customers who have questions about their investment may want to contact a financial adviser. Advisers will be able to help explain how the investment works, whether it is still right for them and what their options are.

“If customers believe they were mis-sold a product they should contact the firm that arranged it for them and raise their concerns. The firm should have a procedure to follow to resolve matters. If the customer is not satisfied with the answer or proposed resolution, they can take their complaint to the Financial Ombudsman Service. If the firm is based in the UK and has gone out of business, the Financial Services Compensation Scheme might be able to help.”

Special purpose vehicles (SPVs) are corporate bodies that can be set up for a number of purposes. Of concern to us in this consultation is the use of SPVs as an investment vehicle to pool investment assets traditionally found within UCIS, whether or not this is done deliberately to avoid the restrictions that apply to the promotion of UCIS.

Pooled investment SPVs can, and often do, carry similar risks to UCIS in terms of operation, structure, governance standards and the choice of underlying assets. They can be used to effectively deliver an identical investment strategy as a UCIS fund.

Examples of investments sometimes held in UCIS and similar products include traded life policy investments, fine wines, crops, unlisted shares and timber. Often, investments into these assets are structured as UCIS but they can also take other legal forms such as securities issued by SPVs.

These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are often 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 more mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors.

Earlier this year the FSA issued over 250 letters to firms active in this market to repeat our concerns and highlight the key regulatory requirements that apply.


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