The Financial Services Authority (FSA) is proposing that Unregulated Collective Investment Schemes (UCIS) should no longer by promoted to the vast majority of retail investors in the UK.
This move follows the FSA previously referring to these unregulated investment schemes as ‘sex and violence’.
As the rules currently stand, UCIS can be widely promoted to retail investors because advisers use one of several exemptions from the relevant section of the Financial Services and Markets Act 2000.
These exemptions can result in retail investors being exposed to the worst of UCIS, which can be illiquid and highly geared, often investing in obscure underlying assets.
When the FSA reviewed the sales of these unregulated investment schemes, they discovered that only one in four advised UCIS sales to retail investors were suitable. In many cases, advisers were breaking the UCIS promotion rules.
These new proposals will not only cover UCIS sales, but also other investment products which carry similar risks.
This is a positive move from the FSA that will go some way towards protecting investors from the £2.5bn UCIS retail market in the UK.
The FSA estimates that around 85,000 retail investors are already exposed to UCIS in such esoteric assets as traded life policy investments, fine wines, crops and timber. There is a further £1.5bn invested in products with similar risks, such as securities issued by special purpose vehicles.
Whilst not every UCIS was mis-sold to retail investors, the FSA research suggests that a high proportion were. This has big implications for every investor as the cost of compensating retail investors in unsuitable UCIS could ultimately fall on the Financial Services Compensation Scheme (FSCS).
As a firm, we are pleased to have never recommended a UCIS to our clients. We view them as simply unnecessary when other regulated collective investment schemes are available which do a much better job without the same risks.
In a typical week we receive invitations to promote various UCIS products to our clients. Because we have a documented investment philosophy, we are able to quickly assess and dismiss these, protecting our clients from highly dubious opportunities they claim to represent.
Photo credit: Flickr/[Klara]
