The Financial Services Authority (FSA) has published proposals to ban the promotion of unregulated collective investment schemes (Ucis) to private investors. There is also a risk that the new rules could restrict access to venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS). If the proposed rules come into force it will only be possible to promote these products to investors categorised as sophisticated or high net worth.
Currently, Ucis can be promoted to ordinary private investors if an adviser first assesses the product's suitability for that investor. The FSA launched a consultation paper on restricting the marketing of Ucis in this way after finding that only one in every four sales of these to retail customers were suitable, and that many promotions breached the restrictions.
The FSA says it is acting due to the high levels of unsuitable advice and the potential for customer detriment. Examples include:
■ Pensioners being advised to invest all of their wealth in a single, illiquid Ucis with a view to generating income.
■ A customer being advised to borrow money to invest in Ucis and service the debt with withdrawals from that investment.
"We estimate that the Ucis retail market is worth around £2.5bn in the UK," says Gavin Stewart, acting director of policy, risk and research at the FSA. "A total of 85,000 ordinary retail investors have direct holdings in these investments, which can hold assets like traded life policy investments (read more on these), fine wines, crops, unlisted shares and timber. Another £1.5bn is invested in products such as securities issued by special purpose vehicles, which can carry similar risks for investors. Under our proposals, firms should only promote these products to people for whom a Ucis or similar product is more likely to be right."
These assets may sometimes appear to offer better returns with less volatility than more usual investment types, making them particularly appealing in the current market environment. But the FSA says they are often higher-risk, and these risks can be unusual and difficult to assess. For example, they may be hard to sell, difficult to value and susceptible to catastrophic loss of value. Governance controls on these can also be weaker than on more mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors.
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But the regulator admits: "Our proposals may limit choice for some consumers but not all innovation or choice is in the interests of retail customers. We are making the judgment that the benefits of improving customer outcomes for most retail investors outweigh the costs to the minority for whom they may be suitable."
However, the FSA consultation also notes that: "The new rules proposed in this consultation do not include execution-only sales if there has been no financial promotion of the non-mainstream pooled investment. Where it is genuinely the case that a retail customer seeks out an investment, acting entirely on their own initiative (for instance, following their own research on investments) and not in response to any promotional communications of any kind, then the proposals in this paper will not restrict investment."
