The Financial Services Authority (FSA) has published proposals to ban the promotion of Unregulated Collective Investment Schemes (UCIS) and similar products to the vast majority of retail investors in the UK.
The proposed rules mean that, in the retail market, promotions will generally be restricted to sophisticated investors and high net worth individuals for whom the products are more likely to be suitable.
Currently, UCIS can be promoted to ordinary retail investors if an adviser first assesses the product’s suitability. In effect, the consultation paper should prevent firms from marketing UCIS to ordinary retail customers, even in the context of financial advice.
The consultation paper follows on from extensive work undertaken by the FSA, which found that only one in every four advised sales of UCIS to retail customers were suitable, taking into account the customer’s needs and requirements. The FSA found that many promotions breach the restrictions and only a minority of advice is suitable.
Certain other products can carry similar risks to UCIS but are not currently subject to the same marketing restrictions and can be widely promoted in the retail market. In this consultation, the FSA proposes to introduce new rules for them to create a level playing field and improve standards of consumer protection.
The FSA is acting because of the high levels of unsuitable advice it has uncovered 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; and a customer advised to borrow money to invest in UCIS and service the debt with withdrawals from that investment.
A number of non-mainstream pooled investments have failed completely in recent years, leading to total investment loss for customers.
Gavin Stewart, acting director of policy, risk and research at the FSA says: “Product risks can be much greater on UCIS and similar products than on more mainstream investments and we have found that the majority of retail promotions and sales fall a long way short of our existing standards. This is important because it is exposing ordinary investors, for most of whom these products are clearly unsuitable, to significant potential for large losses on what are often esoteric and illiquid investments. This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future.”