In a matter of just a few days, the Financial Services Authority (“FSA”) has announced further disciplinary action against independent financial advisors who had given unsuitable advice to customers to invest in Unregulated Collective Investment Schemes (“UCIS”).
On 20 July 2011, the FSA announced that it had imposed prohibitions on two former directors of the IFA, Best Advice Financial Planning Limited, having found weaknesses in the firm’s systems and controls. This had lead to customers being exposed to the risk of receiving unsuitable advice on UCIS. Both former directors were prohibited from holding any significant influence functions in regulated organisations and were fined by the FSA.
This followed on in short order from the disciplinary action announced by the FSA on 12 July 2011 when it fined two former directors of the IFA Alpha to Omega (UK) Limited for widespread compliance failings which had also led to customers receiving unsuitable advice concerning UCIS.
These are the latest disciplinary actions taken against regulated individuals and firms by the FSA as part of its “get tough” campaign against the misselling of UCIS.
UCIS investments are regarded by the FSA as being complex and high risk investments, rarely suitable for retail investors. That is because many UCIS are characterised by a high degree of volatility, illiquidity or both and they are therefore regarded as speculative investments. The promotion of sales of UCIS to the general public is restricted and they can only be proposed to certain limited categories of investors, including certified high net worth investors, sophisticated investors, self-certified sophisticated investors and exiting investors in UCIS. Despite this rule, the FSA has seen evidence that ordinary members of the public are being sold UCIS.
The FSA has repeatedly stated that it is imperative that the customers are fully appraised of the risks by their advisor before investing in a UCIS, and that the advisors are aware of the general restriction on the promotion of UCIS. The FSA became increasingly concerned about promotion of sales by UCIS of firms following supervision and treating customers fairly assessment work back in 2009.
In October 2009, the FSA told smaller IFAs that it would carry out a project focussed on the financial promotions and sales advice processes for UCIS sales. It said it would also assess whether firms were complying with FSA rules and providing fair outcomes for customers.
In July 2010, the FSA then published its general findings on UCIS sales. It said that many firms were seemingly unaware of the restrictions on the promotion of UCIS and may have promoted UCIS where this was prohibited. And even in circumstances where the promotion of advice of UCIS was permitted, the FSA was concerned that the advice given to customers was unsuitable.
There then followed FSA disciplinary action for failings (a mixture of poor systems and controls, failure to understand the restrictions on UCIS sales, unsuitable advice) in respect of UCIS mis-sales against the IFA’s Clark Rees and Moneywise in September and November 2010 respectively, followed by disciplinary action against Prospective Financial Management Limited (February 2011) and Specialist Solutions Plc (April 2011). The FSA has also identified UCIS as an “emerging risk” in its Retail Conduct Risk Outlook in February 2011.
It is clear from the very recent disciplinary action taken against the directors of Best Advice and Omega, that the FSA continues to have concerns regarding mis-sales of UCIS it customers and it has announced that it remains vigilant in this area. Whilst the FSA’s concerns remain unabated, then we can expect the FSA to continue to show its teeth to tot eh regulated community to name, to shame and to fine and to ban organisations and their senior management. The clear message here is that for IFAs who are advising consumers on UCIS is that they must act in accordance with the “best practice” guidance handed down by the FSA in 2010, otherwise they stand the risk of losing their livelihoods.