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Don't get hooked by unregulated funds, warns FSA

The FSA is clamping down on unauthorised collective investment schemes (Ucis), saying investors should go for regulated funds instead.

 

by Michelle McGagh on May 16, 2012 at 07:10

Don't get hooked by unregulated funds, warns FSA

The Financial Services Authority (FSA) is closing a long-standing loophole that allows people to buy high-risk, unregulated investment funds provided they do so through an authorised financial adviser.

Sales of unregulated collective investment schemes (Ucis) have soared in recent years as investors have sought alternatives to conventional investment funds following the financial crisis.

Ucis funds cover a wide range of investment areas, such as overseas property, wine, fine art and forestry. Although these areas are legitimate, the regulator has grave concerns that the unauthorised investment schemes are being oversold to private investors, who are unaware of the risks, such as the problems of getting their money out in a downturn.

It has fined several independent financial advisers for failing to ensure the Ucis funds were only recommended to sophisticated and wealthy individuals who understood what they were getting into and could afford to suffer any losses.

The biggest problem with Ucis funds is that the unregulated investment schemes fall outside the Financial Services Compensation Scheme, so investors have nowhere to turn to if things go wrong.

There have been several scandals involving the sale of Ucis. The FSA was prompted to act by the growth in life settlement funds, nicknamed 'death bonds' because they buy life insurance policies from Americans in poor health, take over the payment of the premiums and receive the payout when the insured person dies.

Promoters of life settlement funds claim they offer a low risk way of generating sustainable investment returns. Critics say the sector is rife with high charges and conflicts of interest that make the funds unsafe for most private investors.

After a review the regulator came down on the side of the critics, describing life settlement funds as ‘toxic’ and ‘unsuitable for the majority of UK retail investors’ and saying it would ban their sale to the public.

It also said it would ban the marketing of all Ucis funds to private investors in the UK. 

Peter Smith, FSA head of investment policy, said: ‘We believe that life settlement policies and all Ucis should not generally be marketed to retail investors in the UK.’

Read our guide to regulated investment funds: 'What are investment funds and how do I buy them?'

What this means for investors

Alan Dick, principal and certified financial planner at Glasgow-based Forty Two Wealth Management, an independent financial adviser, said the FSA was right to push for a ban on Ucis being sold to private investors.

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6 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

May 16, 2012 at 09:08

The FSA rightly says that UCIS cover a wide range of investments yet it continues to tar all UCIS with the same brush.

To the FSA's simple mind a fund based in the UK investing in ground rents in the UK with a 20 year track record of steady income but is purely a UCIS because it choses to operate on a LP basis than a regulated unit trust is as bad as some palm oil plantation scam in Asia.

Rather than ban all UCIS the FSA should, instead of using its normal sledgehammer approach, seek to build some sort of risk rating classification of UCIS investments.

What right has the FSA to ban private investors from taking "advised" risk?

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Dawn Bird

May 16, 2012 at 10:33

I have to say that I am not a financial advisor, so forgive my ignorance. A relative of mine invested a sum of money in a Life settlement fund and said that he was more than delighted with the returns that he obtained (not Life mark). There was never an issue for him about withdrawing his money when he needed it. It seems that a few of these funds are extremely well run and perform well. I am thinking about investing in one of these UCIS, but do wish that journalists would give a little more information on which Funds are well run and which are not instead of regurgitating the same old stuff that the FSA said last year about Life Funds in General!

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Ian Phillips

May 16, 2012 at 14:42

FSA hmmm? isn't this the bunch that regulated the banks?

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Keith Cobby

May 16, 2012 at 16:14

Unregulated investments should be execution only. No selling therefore no compensation.

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richard john brydon

May 16, 2012 at 17:32

I was under the impression that the llfe expectancy aspect of the life assured within life settlement funds, was arrived at by medical experts and not actuaries.

Outcomes may still turn out to be different from the expectancy, but that's obvious. Plan B, or whatever you way you wish to label it, is built in, surely?

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Jonathan Gain

May 16, 2012 at 18:38

All funds fall outside the ambit of the FSCS, it doesn't matter if they are UCIS or UCITS.

If the fund manager contributes to the FSCS then the investors may be covered - nothing to do with the funds.

The FSA and the press subsequently are highlighting the wrong point.

Not all UCIS are bad and surely ones with regulated managers/operators would provide greater comfort to advisers and investors. The proposals the FSA have in beefing up the standing of those involved is entirely sensible.

We then end up as to how the FSCS should be funded as good advice should not always bail out the not quite so good but thats another story.....

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