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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.

City regulator to ban sale of unregulated funds to ordinary investors

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.

There has also been failures in the life settlement fund industry, most notably Keydata Financial Services – a scandal which saw £103 million stolen from the funds and investors left with nothing.

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.

6 comments so far. Why not have your say?

Jonathan Bond

Aug 22, 2012 at 12:39

"life settlement funds ... buy life policies ... then bank on the individual dying sooner rather than later so they can cash in the policy".

No they don't. Inaccurate reporting like this serves only to further unjustly tarnish the image, name and reputation of properly run life settlements funds, which are still reeling from the FSA's inappropriate and unprofessional public rant last year.

A well run life settlements fund can operate to the benefit of all parties involved, including investors and insured individuals. Come on Citywire, you're better than the FSA. Aren't you?

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Insiders Comment

Aug 22, 2012 at 13:37

The FSA should just tell all IFA's what they should sell ans what they should not..its what they are doing anyway but ny the back door. The reason why they dont is they will fall short of their own impossible rules. A ridiculous organisation overseen by an inept Governement. It what you expected from bossy boots Brown but NOT what I expected from a Tory led Government - well heres one life long Tory who wont be giving Dave a vote next time and everyone that I talk to will be given the same advice.

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A Sick SIPP Owner

Aug 22, 2012 at 13:49

Consider -

I could put my 'SIPP savings into a 'fund' that has purchased a large number of USA government guaranteed policies, 'owning' a few percent of each of hundreds of policies from getting on for 100 different insurance companies,


I can 'buy' an annuity from a single UK insurer, without any government guarantee, so I should just hope the insurer I select does not go bust, or even just get into financial trouble.

And - thanks to the government, EU and QE, that annuity will be at a rate similar to that I could get from a fixed period savings account with a bank, and has no 'capital' value on my death (well, if I live for 5 years!)


The 'investment' of my SIPP in Death Bonds will (well, without the effect of the regulators would) have given me

a yearly return to match the GAD,

and a return of my capital in 10 years,

or I die before the 10 year commitment, to my estate (less 55% tax) for 40% estate duty!

So, having actually been stupid enough to save into a government manipulated, and taxed pension fund, - which option should I chose for the savings fund I have accrued but now am not allowed to actually spend?

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Jeremy Bosk

Aug 22, 2012 at 18:03

The FSA does more harm than good. It should be scrapped. "Alternative" investments seem to attract a higher proportion of fraudsters and incompetents than long established and publicly traded varieties. Though Asil Nadir and Polly Peck remind us that dishonesty is everywhere. So caveat emptor.

The sort of people who are stupid enough to invest in obvious scams will be fleeced one way or another anyway. Ban investing in wine or Florida Real Estate and they will go the casino or the betting shop. It would be perfectly legal to sell everything you own, max out your credit cards and put the proceeds on an outsider in the Grand National. Could the men in white coats stop you?

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Craig Taylor

Aug 23, 2012 at 11:34

The problem with many of the failed Ucis schemes was in the product design and the disclosure surrounding them. Not all are bad and limiting investor choice is not always a good thing. A good advisor should be able to spot the scams and unworkable ones.

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Jeremy Bosk

Aug 23, 2012 at 12:36

You only find a good adviser through personal recommendation. I personally know only three people who invest beyond their company share save scheme. Neither takes advice. One is successful and the other does a lot worse than me.

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