Promotion of "riskier" unregulated investment funds to ordinary investors banned

Out-Law News | 04 Jun 2013 | 4:20 pm | 2 min. read

Financial advisers are to be banned from promoting unregulated investments in fine wines, crops and traded life policies to ordinary investors, the financial services regulator has confirmed.

The new rules will restrict the promotion of unregulated collective investment schemes (UCIS) and similar products to more sophisticated investors. According to a policy statement published by the Financial Conduct Authority (FCA), the changes will come into force from 1 January 2014. However, firms are being encouraged to adopt them sooner.

"Consumers have lost substantial amounts of money investing in UCIS and similar products in recent years so the need to introduce new rules to prevent this from continuing was essential," said the FCA's Christopher Woolard. "However, we have also taken into account that for some investors these products can still be appropriate."

"We believe today's rules strike the right balance. They should go a long way in helping to protect the majority of retail investors in the UK from inappropriate promotions while allowing the industry to market these risky, unusual or complex investment propositions to those experienced investors for whom they could be suitable options," he said.

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. 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 new rules will ban the promotion of UCIS and certain "close substitutes", together referred to as 'non-mainstream pooled investments' (NMPIs), to the vast majority of retail investors. Advice on these schemes will generally only be made available to "sophisticated" investors, which will include high net worth individuals (HNWIs) who earn more than £100,000 or have more than £250,000 to invest.

The ban comes as a result of extensive work by the FCA's predecessor, the Financial Services Authority (FSA), which found that only one in four advised sales of UCIS to retail customers was suitable and that many promotions breached existing marketing restrictions. According to the FCA, a number of NMPIs have recently "failed completely" resulting in customers losing their total investment.

The final rules are slightly different from those originally proposed by the regulators, which the FSA consulted on last year. The list of products subject to the ban has been amended in order to "focus more tightly" on those products posing the greatest risk, the FCA said. Promotion of exchange traded products, overseas investment companies that would meet the criteria for investment trust status if based in the UK, real estate investment trusts (REITs) and venture capital trusts (VCTs) will not be restricted, as indicated by the FSA in a letter to firms in February. Enterprise investment schemes (EIS) and seed enterprise investment schemes have also been removed from the restrictions unless structured as UCIS, the FCA said.

The regulator said that it would "continue to review market developments" to ensure that the rules covered all unsuitable products and that firms were not trying to avoid the marketing restrictions, it said. The FCA has the power to make a temporary product intervention rule to restrict a product before it has the chance to consult in certain circumstances. It is also monitoring the market in relation to "novel" products which are not pooled investments, and will consult on new marketing restrictions in relation to unsuitable products that fall into this category shortly, it said.

Financial services expert Monica Gogna of Pinsent Masons, the law firm behind, said that the announcement marked a "clear line in the sand" between retail and non-retail investors that the new regulator wished to impose.

"The FCA has demonstrated its willingness to use the new regulatory powers given to it," she said. "However, the question remains as to whether, in time, this willingness to ban products may lead to a real block on product innovation, which can also potentially cause detriment to the consumer."