FSA clampdown on UCIS sales



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, today’s 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 said:
“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.

“We estimate that the UCIS retail market is worth around £2.5 billion in the UK. A total of 85,000 ordinary retail investors have direct holdings in these investments, which can hold assets like traded life policy investments, fine wines, crops and timber.  Another £1.5 billion is invested in products, such as securities issued by special purpose vehicles, which can carry similar risks for investors. Under our proposals, firms should only promote these products to people for whom a UCIS or similar product is more likely to be right.

“While we have found problems with a number of sales, we are not saying that all existing investments were mis-sold.  Existing customers who have questions about their investment may want to contact a financial adviser.  Advisers will be able to help explain how the investment works, whether it is still right for them and what their options are.

“If customers believe they were mis-sold a product they should contact the firm that arranged it for them and raise their concerns. The firm should have a procedure to follow to resolve matters. If the customer is not satisfied with the answer or proposed resolution, they can take their complaint to the Financial Ombudsman Service. If the firm is based in the UK and has gone out of business, the Financial Services Compensation Scheme might be able to help.”