FSA to ban promotion of unregulated investment schemes to "vast majority" of retail investors

Out-Law News | 24 Aug 2012 | 3:40 pm | 2 min. read

Unregulated investments in assets such as fine wines and unlisted shares should no longer be marketed to the "vast majority" of ordinary investors, the Financial Services Authority (FSA) has said, after it found that three out of every four advised sales were unsuitable.

The regulator has published proposals to ban the promotion of unregulated collective investment schemes (UCIS) and similar products in the majority of cases, rather than allowing financial advisers to make a judgement call on a product's suitability for a particular investor as at present. The changes will, it said, mean that advice on these schemes will generally be available only to high net worth individuals who earn more than £100,000 or have more than £250,000 to invest, and to other "sophisticated" investors.

"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," Gavin Stewart, acting director of policy, risk and research at the FSA, said. "This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future."

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, the FSA said, the schemes appear to offer better returns than more traditional investment types but they tend to carry higher risks which are often "esoteric and difficult to assess" as well as weaker governance controls. Investments sometimes held in UCIS and similar products include traded life policy investments (TLPIs) or 'death bonds', fine wines, crops, unlisted shares and timber.

The UCIS retail market is worth around £2.5 billion in the UK, according to FSA estimates, and around 85,000 ordinary retail investors have direct holdings in these schemes. Another £1.5bn is invested in other products which can carry similar risks, such as securities issued by special purpose vehicles (SPVs).

The consultation follows on from "extensive" work undertaken by the regulator into the way in which UCIS are marketed and sold to retail investors. According to its research only one in every four of advised sales of these products to retail customers were suitable when the customer's needs and requirements were taken into account. The FSA uncovered cases of pensioners being advised to invest all of their wealth into a single, illiquid UCIS with a view to generating income and one case in which a customer was advised to borrow money to invest in a UCIS product and repay the debt using money withdrawn from that investment.

In April this year, the FSA published guidance strongly recommending that "toxic" TLPIs should not be promoted to the vast majority of retail investors in the UK and warned that tighter restrictions on other non-mainstream investment types were coming. TLPI investors put their money into a pooled investment or fund which invests in life insurance policies, typically of US citizens. If the policyholders live longer than expected, the investment will not return as much money as the investor anticipated.

"Under our proposals, firms should only promote these products to people who whom a UCIS or similar product is more likely to be right," Stewart said. "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."

Financial advisers would, he said, have procedures in place to deal with any customer concerns, with the Financial Ombudsman Service available to help in cases where the dispute was not resolved satisfactorily or the firm had gone out of business.

Comments can be made on the proposals until 14 November, and the FSA expects to produce a policy statement and finalised rules in the first quarter of 2013.