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City regulator to ban sale of unregulated funds to ordinary investors
The sale of unregulated collective investment funds to investors who are not sophisticated or of high net worth will be banned under new rules.
The City regulator is planning to ban the sale of risky unregulated investment products to ordinary retail investors after finding pensioners and debt-ridden customers had been mis-sold the funds.
Under the Financial Services Authority (FSA) proposals, unregulated collective investment schemes (Ucis) will still be available to sophisticated investors and high-net-worth individuals.
After a review of Ucis the FSA found just one in four advised sales of Ucis to retail customers were suitable for the customer’s need and requirements and that advisers selling the funds – which usually invest in esoteric investments such as teak and fine wines – were promoting them incorrectly and falling foul of the FSA’s rules.
Although Ucis funds are not regulated by the FSA, the advice given by financial advisers selling them is and many advisers have not promoted them to investors appropriately.
In the worst cases of mis-selling of Ucis the FSA found pensioners being advised to invest all of their wealth in a single, illiquid Ucis with a view to generating income and one customer who had been advised to borrow money to invest in a Ucis and service the debt with withdrawals from the investment.
The ban on promoting Ucis to retail investors will also extend to other pooled investments, including life settlement funds. These funds buy life policies, offering the beneficiary a lump sum below the value of the policy. They then bank on the individual dying sooner rather than later so they can cash in the policy.
A number of Ucis have failed completely in recent years, leading investors to lose all of their money as Ucis are not regulated by the FSA and therefore do not come under the Financial Services Compensation Scheme.
One high profile Ucis failure was that of Connaught Asset Management, which wound down three Ucis funds – Income Series 1, 2 and 3 – which saw a spike in redemptions following an FSA warning about mis-leading advertising.
Gavin Stewart, acting director of policy, risk and research at the FSA, said the Ucis market is worth £2.5 billion in the UK and 85,000 retail investors have holdings in this type of investment. Another £1.5 billion is invested in products which carry similar risks for investors, such as securities issued by special purpose vehicles- corporate bodies that are set up to pool investment money which is then invested in Ucis.
‘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,’ said Stewart.
‘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 investment. This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future.’
Stewart urged Ucis investors who think they may have been mis-sold to contact their adviser.
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