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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
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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