In a recent consultation paper (August 2012), the FSA proposes a tougher regime to regulate the marketing of Unregulated Collective Investment Schemes (known as UCIS).
The consultation paper is borne out of concern that "ordinary retail clients" are being exposed to "higher risk, speculative investments" in the form of UCIS products. UCIS investments, which invest typically in overseas property and commodities such as fine wines, crops and traded life policies, are said by the FSA to be inappropriate for the majority of investors. However, the FSA concludes that the current restrictions imposed on the marketing of UCIS products are "widely misinterpreted, poorly understood and sometimes ignored". The FSA's research found that as few as one in four UCIS sales appeared appropriate for the investor. Additionally, due to their unregulated status the usual channels of compensation are not always available to investors.
The FSA consultation paper proposes reform to:
- limit the customer base to whom UCIS and similar products can be marketed;
- provide guidance on unlawful promotion;
- impose more stringent compliance requirements to ensure recommendations are suitable.
Broadly, only sophisticated investors and high net worth clients who satisfy specific criteria will be deemed suitable for UCIS products in the future.
The crackdown extends to alternative structures often used to circumvent the current UCIS rules such as Special Purpose Vehicles and Qualifying Investor Schemes. However, traded life policies are being looked at separately.
Recently, UCIS products have underperformed for a variety of complex reasons resulting in a surge of complaints. The FSA's consultation paper advises investors currently invested in UCIS products to review their investments and if they are dissatisfied to complain to the firms or ultimately to the FOS. This is likely to lead to a further influx of complaints. This development is likely to concern firms providing financial services and their insurers, as they will be defending claims from the starting point that UCIS products are high risk and largely unsuitable.
The deadline for a response to the consultation paper is 14 November 2012 with the FSA's findings due to be published in early 2013. In the meantime, firms with clients exposed to UCIS products should keep abreast of developments and be ready for procedural changes in how UCIS products can be marketed. Firms may opt to review their current UCIS portfolios. If they have any concerns about current UCIS portfolios or require more information they can contact any of the contacts below.