Out-Law / Your Daily Need-To-Know

FSA rethinks proposed restrictions on the marketing of certain types of investment fund

Out-Law News | 13 Feb 2013 | 3:17 pm | 2 min. read

The financial services regulator is rethinking its plans to restrict the marketing of certain types of "non-mainstream" investment schemes to ordinary retail investors, it has said.

In a letter to firms (2-page / 63KB PDF), the Financial Services Authority (FSA) suggested that some products classified as unregulated collective investment schemes (UCIS) should be excluded from the final rules. The letter named venture capital trusts (VCTs), real estate investment trusts (REITs), exchange-traded products and those overseas investments that would likely be categorised as investment trusts if based in the UK as falling into this category. UK-based investment trusts are already exempt from the restrictions.

The final proposals will be confirmed after they have been considered by the new Financial Conduct Authority (FCA) when it takes on the conduct and compliance functions of the FSA in April, the regulator said. These would "find the right balance between consumer protection and fairness", according to the letter.

Firms would also be given "sufficient time" to implement any rule changes according to the letter, which was signed by FSA investment policy head David Geale. This is usually one year in the case of "substantial" rule changes", he said.

The FSA published proposals to ban the promotion of UCIS and similar products in the majority of cases in August. As proposed, the changes would mean that advice on these schemes will generally be available only to "sophisticated" investors, such high net worth individuals who earn more than £100,000 or have more than £250,000 to invest. Currently, financial advisers have discretion over a product's suitability for a particular investor.

Among the professional bodies which objected to the new rules was the Association of Investment Companies (AIC). In its response to the FSA's consultation, the AIC said that products such as VCTs and certain non-UK investment companies did not "create the problems that the FSA is concerned with" and that the proposals could "restrict the ability of consumers to gain exposure to these asset classes" even if they were the most suitable product for that customer.

UCIS are collective investment schemes that are not subject to the same rules governing borrowing powers, disclosure of fees and conflicts of interest, and investor safeguards as would be the case if they were regulated. In many cases, UCIS appear to offer better returns than more traditional investment types, but tend to carry higher risks.

According to the FSA's letter, responses to the consultation raised concerns that the proposals would catch products that "should not face restrictions" on how they are marketed and were not flexible enough to allow firms to promote products to more sophisticated customers. Respondents also suggested that the rules should be expanded to catch products including enterprise investment scheme (EIS) funds and seed EIS funds. These products have similar tax advantages to VCTs, but are investment schemes rather than trusts. According to the letter, the FSA is "considering these issues further".

"Our central aim is to prevent the promotion of non-mainstream pooled investments to ordinary retail investors while allowing scope for firms to market these products, where appropriate, to high net worth or sophisticated retail investors (promotion to non-retail investors is not affected by the new rules)," Geale said in the letter.

"In order to achieve this, our original proposals allowed firms to market products where the promotion met criteria outlined in secondary legislation ... We are considering whether this provides sufficient flexibility for firms with high net worth or sophisticated customers. For instance, we are considering whether we should allow firms to promote schemes that allow high net worth individuals to benefit from Business Property Relief and Business Premises Renovation Allowance," the letter said.

The regulator was also considering how best to ensure an "effective and proportionate approach" to any additional sign-off requirements needed to ensure that each promotion complies with the rules, it said.