The Unregulated Collective Investment Scheme (UCIS) Controversy

The subject of UCIS has become prevalent and controversial in recent years – Firms lack awareness and understanding of the regulatory requirements. FSA have produced reports surrounding the issue.

FSAUCIS (Unregulated Collective Investment Schemes) are defined as unregulated because the schemes often comprise offshore investments in high net worth arrangements, such as off-plan property developments.

These investment schemes have become more prevalent and controversial in recent years, due to the issues identified by the FSA in 2009.

During their investigation into TCF (Treating Customers Fairly) and more general supervision work, the FSA flagged apparent issues surrounding the sale and promotion of UCIS by small firms.

These issues prompted a comprehensive review, resulting in the compilation of the UPFR (UCIS Project Findings Report) in July 2010, which primarily focused on firms’ lack of awareness and understanding of both the regulatory requirements and the market risks of UCIS.

Ultimately, the failure to understand the risks and regulatory requirements governing such schemes has resulted in UCIS being promoted and recommended to customers who are simply not eligible for this type of investment.

Following the finding of UPFR, the FSA has produced the good and poor practice report, which defines good and poor practice when promoting and providing investment advice on UCIS.

In response to this thorough investigation Linda Woodall, Head of Savings and Investments at FSA, has confirmed the FSA’s perspective on UCIS as “high risk, speculative investments characterised by a high degree of volatility or both, which are unlikely to be suitable for a large majority of retail customers.”

In Linda Woodall’s speech at the FSA Investment Managers and Private Equity Event, she was quick to clarify the common misconception that the FSA is responsible for the complicated rules governing UCIS.  She confirmed that it is in fact the FSMA (Financial Services and Markets Act) rules that bind the promotion, advice and subsequent sale of UCIS to retail customers, rather than the FSA.

The UPFR initially undertook a high level, desk-based review of 66 IFAs but eventually short-listed 14 firms for a full review. 11 out of the initial 14 firms were requested to appoint a skilled person under S166 FSMA to review their UCIS promotions; whereas 4 of the firms had to appoint a skilled person for the advice given on UCIS, potentially resulting in firms being required to redress those customers affected.

Although UCIS are not authorised, companies carrying out regulated activities are in fact subject to FSA regulation, which includes the recommendation of UCIS. Several firms currently find themselves under the scrutiny of the FSA, which will inevitably increase the scope for a raft of both past business and S166 reviews.

Graham Dalby, an experienced financial services contractor who is currently working on S166 reviews, has commented that:

“Volatile and often poor returns in more traditional asset types over the last 5 to 10 years has clearly left the advisers looking for something appealing to offer investors. The promotion of the now ubiquitous UCIS has caused not just a question over its suitability for many retail clients, but also the way in which they have accessed them. There is a strong feeling that not only would many clients not fit the risk profile of this product, but also in many cases the SIPP they may have used to purchase it, is not otherwise a vehicle they would require.”

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