On 4 June 2013 the FCA produced a policy statement and rules (PS13/3) which places restrictions on the promotion of unregulated collective investments schemes (UCIS) and nonmainstream pooled investments (NMPIs) to retail investors. The new rules will take effect from 1 January 2014 and it is important for firms to have a clear understanding of the rules and their effect on the promotion of investment products before this date.
The purpose behind the rules is to protect ordinary retail customers from certain products which are viewed as complex and high-risk. The FSA previously found that just one of every four advised sales of UCIS to retail customers was suitable. The FCA rules follow an extensive consultation period on the subject of NMPIs and the feedback received from stakeholders.
The new FCA rules
The new rules work together with section 238 Financial Services and Markets Act 2000 (FSMA) which contains existing restrictions on the promotion of collective investment schemes. Under the new FCA rules a regulated firm must not communicate or approve an invitation or inducement to participate in, acquire, or underwrite a non-mainstreamed pooled investment which is addressed to or disseminated in such a way that it is likely to be received by a retail client unless an exemption applies. An exemption could, for example, apply to promotions to a sophisticated retail investor or high net worth individual. The FCA recognises that there are different classes of retail investors and that products may be suitable for sophisticated retail investors or high-net worth individuals which will not be suitable for other retail investors.
In addition to this requirement firms will need to keep accurate records to reflect their compliance with these rules. Firms must make a record certifying that any promotions of these products complies with the requirements of s238 FSMA and rule 4.12.3 of the FCA Conduct of Business Rules (COBS) as amended. Firms must also make a record of any exemptions relied upon to permit the promotion of NMPIs to retail customers.
What falls within the scope of the new rules?
The aim of the new rules is to cover higher risk products and in particular units in UCIS and products that are identified as close substitutes. These products are identified in the rules as NMPIs and it is promotion of these products to retail investors that is restricted. The definition of NMPIs includes traded life policy investments, units in qualified investor schemes and securities issued by SPVs pooling investment in assets other than listed or unlisted shares and bonds. Although it does not appear to have been the FCA’s aim to look in detail at securities issued by SPVs it had found that these can be used to facilitate investment in higher risk products. For this reason securities issued by SPVs in non-mainstream assets will fall within the scope of the rules.
The rules will apply to regulated firms marketing this type of product and may also apply where regulated firms make personal recommendations about products falling within the definition of NMPIs.
What falls outside the scope of the new rules?
A number of investment products will still fall outside the new restrictions and these include venture capital trusts, real estate investment trusts, exchange traded products and securities issued by SPVs pooling investment in listed or unlisted shares or bonds.
The FCA makes it clear however that firms should still take care to properly assess the suitability of these investments for ordinary retail investors before promoting the products to them.
What are the key changes to the current rules?
Under the present rules firms authorised by the FCA are able to promote UCIS to exempt persons. The exemptions include self-certified high net worth individuals and self-certified sophisticated investors. A number of additional exemptions are also set out in COBS and these include persons who are already participating in UCIS or have in the last two and a half years, professional clients and persons whom the firm believes the investment is suitable for.
The most notable changes are that the scope of the restrictions has been extended to cover products that the FCA judges to be close substitues for UCIS as set out above. Additionally firms will no longer be able to promote investments in these products where they believe the investment would be suitable or judge that the investor has sufficient knowledge and understanding of the risks to make a decision on the product. Firms will however be able to assess a client and certify that they are sophisticated provided that they obtain confirmation from the client.
The effect of the new rules in practice
In most cases NMPIs and products judged to be complex and high risk would only be marketed to sophisticated investors already. The new rules however should ensure that this will be the case and should provide greater protection for ordinary retail investors. Firms will need to consider their products and which of these fall within the definition of NMPIs.
Firms should also be advised to consider their customers and their classifications and the methods adopted in the classification process in order to ensure compliance with the new rules.
In addition the rules will place more stringent record- keeping requirements on firms who are promoting this type of product. Firms may already have record keeping procedures in place but it would be advisable to give them fresh consideration in advance of the new rules coming into force next year.