Adverts for unregulated collective investment schemes (UCIS) make up a reasonable proportion of what I define as spam in my email inbox each week.
It came as little surprise to learn today that the Financial Services Authority (FSA) is taking enforcement action against six IFA firms due to their failings in the sale of these products.
This enforcement action is a result of a review of the use of UCIS by IFA firms, prompted by supervision and Treating Customers Fairly (TCF) assessment work completed by the regulator last year.
The FSA review addressed concerns about three main areas; lack of awareness of the regulatory requirements for UCIS, lack of understanding of the UCIS market and risks, and promotion of these unregulated investments that breached FSA rules.
The findings of this review are disappointing, to say the least.
Rules on promoting UCIS were broken by 78% of the firms reviewed. In simple terms, UCIS cannot be promoted to the general public. They can only be promoted by an authorised person, or by an unauthorised person where the promotion has been signed off by an authorised person.
A set of exemptions exist which enable promotion of UCIS to certain types of investors, namely certified high net worth investors and sophisticated investors.
In 22% of the cases reviewed, the firms failed to demonstrate the suitability of their advice. In 52% of cases, the firms did not obtain adequate information about their clients to evidence suitability.
Whilst UCIS themselves are not regulated in the same way as the regulated collective investment schemes we recommend to our clients, they remain subject to FSA rules in terms of their promotion, distribution and suitability.
Investing in an UCIS poses a higher risk to an investor than investing in a regulated collective investment scheme. They tend to invest in assets not available to regulated funds, often because they are riskier or less liquid. They are also not subject to the same investment and borrowing restrictions as regulated funds.
You also forfeit your right to support by the Financial Ombudsman Service (FOS), if you have a complaint, and coverage by the Financial Services Compensation Scheme (FSCS), if you require compensation.
Sadly, as is often the case when poor selling practices are uncovered in retail financial services, high commission payments and other incentives appear to have played a role.
The FSA explained with their findings that advisers were being wooed by high commission payments from UCIS, and often get offered free trips to resorts when they are talked into offering them to their clients. That this sort of thing is still occuring in an increasingly professional advice sector is a clear signal that a further drive towards increased professionalism is needed urgently.
We can only hope that the new requirements being introduced in 2012 for all financial advisers to be qualified to a higher professional standard and operate on a more transparent remuneration basis will go some way towards solving a problem like inappropriate UCIS sales.
