The Financial Conduct Authority (FCA) has published rules which will ban the promotion of certain esoteric and riskier funds to most private investors.
Examples of underlying assets often held in these banned funds, called Unregulated Collective Investment Schemes (Ucis), include fine wines, crops, timber, speculative financial instruments and traded life policies. Product providers will not be able to market traded life policies to most private investors even if they are contained within structures that are not Ucis, as is generally already the case.
"These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are often actually higher risk investments," says the FCA. "The risks they carry are often esoteric and difficult to assess. For example, they may be illiquid, difficult to value and prices may be volatile. Governance controls can also be weaker than on more mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors."
The ban on promotions of Unregulated Collective Investment Schemes (Ucis) and some close substitutes which the FCA refers to as ‘Non-Mainstream Pooled Investments (NMPI) will mean that the following types of fund and investment cannot be marketed to private investors: ■ Units in qualified investors schemes (QIS); ■ Traded life policy investments; ■ Units in UCIS; and ■ Securities issued by special purpose vehicles pooling investment in assets other than listed or unlisted shares or bonds. |
Even if you have a discretionary portfolio manager running your portfolio, they may not be able to buy estoteric funds on your behalf. "A discretionary manager should exercise particular care when placing ordinary retail investors' money into these products, to satisfy him or herself that it is suitable for each particular client and is in the best interests of that client," says the FCA.
Ucis are not covered by the Financial Services Compensation Scheme (FSCS), so unlike with regulated investments, you do not qualify for compensation in the event of failure.
The marketing restrictions come into force on 1 January 2014.
The FCA is now looking into the restriction of marketing products which are not pooled investments. These include contingent convertibles (CoCos), building society deferred shares and similar instruments, which were once only offered to institutional investors, and which the FCA says carry risks unfamiliar to and inappropriate for many private investors.
It had been feared that venture capital trusts (VCTs) would be caught by the legislation, but in February the FCA indicated that these, as well as real estate investment trusts (Reits) and some exchange traded funds (ETFs) would not be included. The FCA has now confirmed that a number of investments will not be affected by the marketing restrictions. These include:
■ ETFs
■ Offshore investment trusts
■ Reits
■ VCTs;
■ Enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) which are not structured as Ucis; and
■ Special purpose vehicles pooling investment primarily in shares and bonds.
Although not all EIS are excluded, as virtually none of the existing ones have a Ucis structure they are largely unaffected. Most EIS take the form of a single security or discretionary portfolio.
It will still be possible to market Ucis and NMPI to retail investors categorised as high net worth or sophisticated, so if you are interested in buying them Philip Rhoden, director at discount broker Clubfinance, says you could try to register as such with an independent financial adviser (IFA), or self certify, though you have to satisfy a number of criteria - and will have to pay the IFA's fee.
What should I do?
The FCA says that investors who already hold an NMPI may want to get advice on whether it is suitable for their needs. The marketing restrictions have been drafted so that firms may continue to provide advice on existing investments and whether they should be retained or sold.
And if a private investors has come across an NMPI of their own accord they can also seek advice on it.
If you are not certain of what you have in your portfolio, and are concerned you may hold a Ucis, you should ask an IFA to look at your investments and how they are designed to meet their investment objectives. Advisers should be able to explain risk associated with the investments and why they are suitable for you. If you do hold a Ucis you should ask the company or adviser which sold it to you if you qualify as a high net worth or sophisticated investor.
Investors should also confirm with their adviser what charges there are, what the rate of return is and whether this is actual or targeted.
If you are not happy with the level of risk you are exposed to you should ask what the implications would be of re-arranging your portfolio to better reflect your requirements and risk appetite. If you think a firm has promoted or sold a Ucis that is not suitable or that the risks were not fully explained, you should make a complaint to the firm involved.
Read more on what to do if you think you have been mis-sold an investment
Even though Ucis are not authorised or recognised, activities in relation to Ucis such as providing recommendations and advice, or arranging, operating and managing the schemes, are still regulated. So you should ask whether you have access to the Financial Ombudsman Scheme (FOS) and FSCS if things have gone wrong, and seek independent professional advice if they are in any doubt about the potential risk and returns involved.
Read more about how to Protect your Sipp from nightmare investments
