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Why you should avoid Ucis at all costs

Unregulated collective investment schemes (Ucis) are 'clearly unsuitable' for the ordinary investor, according to the FSA. Here's why...

 

by Victoria Bischoff on Aug 24, 2012 at 12:06

Why you should avoid Ucis at all costs

The regulator has this week proposed plans to ban the promotion of unregulated collective investment schemes or ‘Ucis’ to retail investors.

For most ordinary investors these products are ‘clearly unsuitable’, the Financial Services Authority (FSA) said. They are ‘esoteric and illiquid’ in nature and leave investors ‘exposed to significant potential for large losses’.

Here we explain why exactly investors should steer clear of this risky investment.

1. They are unregulated

First, as the name clearly states, this type of investment is unregulated.

Regulated investment schemes are required to meet certain standards set out by the Financial Services Authority (FSA) which dictate how the investment must run and the risks it can take. Schemes that fail to meet the FSA’s requirements face regulatory action and can be shut down.

Unregulated investments, however, are not subject to these restrictions and frequently invest in assets that are not available to regulated schemes. They may also have a much more complex structure with opaque fees and charges and are not required to abide by the FSA’s borrowing or ‘gearing’ restrictions. As a result they are generally considered by the FSA to be much riskier. 

2. No redress

Next, because Ucis are not regulated by the FSA investors are not protected by either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).

This means that should the scheme experience problems or go bust investors will not be able to claim compensation – at present investors in regulated schemes are entitled to up to £50,000 per firm under the FSCS. 

An investor into an unregulated scheme will also be unable to seek help from the Ombudsman should they wish to make a complaint.

Although, it is important to point out that while Ucis funds are not regulated by the FSA, the advice given by financial advisers selling these investments is. So, if you think you have been mis-sold an unregulated investment scheme by a regulated adviser you are entitled to protection from the FSCS and the FOS.   

3. Risky investments

Ucis typically invest in assets that can be extremely difficult to value – such as fine wine, crops and timber, for example – and are therefore only really appropriate for investors with a decent amount of knowledge of the industry.

What's more, these types of investments are generally illiquid as they are not traded on an established exchange, which means it can be difficult to get your hands on your money at short notice. And according to the FSA, can be susceptible to catastrophic loss of value.

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20 comments so far. Why not have your say?

AJMcG

Aug 24, 2012 at 12:37

I fully support this article and would like to see it more widely publicised because I suspect that the type of investor who is likely to be caught out will not be subscribing to publications which give good commonsense advice such as Citywire Money.

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Anonymous 1 needed this 'off the record'

Aug 24, 2012 at 13:13

Hmmm, as someone who invested in Arch Cru, a suposedly authorised investment covered by the FSA it seems that the protection of such leaves a lot to be desired.

If the FSA actaully checked and stood behind authrised investments then using unauthrised ones would be a bigger risk, my experience wioth Arch Cru is that there seems to be not much checking involved,

Arch Cru, were offshore, invested in non liquid assests, had high charges and incentives to intermediarys. Exactly what the warninbgs seem to say are the problems with UCIS, so how come they were authorised by the FSA ?

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Dennis .

Aug 24, 2012 at 13:21

The FSA seal of approval didn't do much for Equitable Life!

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Paul Eden

Aug 24, 2012 at 14:34

I was very interested to learn that fine wines are considered riskier investments and difficult to value because I had been thinking of investing there. Obviously I shan't.

Carbon trading, I imagine, is probably easier to value...or is it? Very difficult to judge but I wonder what things such as these would come under Ucis?

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J Thomas

Aug 24, 2012 at 15:23

This is exactly what happened to clients of Dunedin Ind plc, an IFA firm based in Edinburgh's Charlotte Square. Many clients were advised to invest in high risk, high fee Ucis commercial property investments. Needless to say the investments collapsed, with near total losses for clients of up to £6 Million.

When the claims started to come in the Company simply did ' The Old Switcheroo ' as it's known in the trade. Dunedin was liquidated in Feb 2012 and the twenty Directors and staff simply set up a new IFA over the Square named ?

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tim barnes

Aug 24, 2012 at 15:29

I generally agree with what others have said, but I am concerned about any absolute ban on marketing anything to retail investors – this just increases our reliance on the middlemen who will have a monopoly on marketing (and mis-selling) such products. I think the current requirement for many "high-risk" investments that as a retail investor one has to sign a declaration concerning either one's net worth or one's substantial experience of investing is a better model, and could be further refined to ensure protection for those who may be enticed into such investments either directly or through middlemen without adequately understanding the risks involved..

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Dawn Bird

Aug 24, 2012 at 16:01

I thought that Keydata were a regulated fund and also authorised by the FSA. It collapsed because a person stole the investors money and ran to Singapore where he died, nothing to do with the assets. Some investments do I admit look dodgy but not all of them . £50,000 is quoted as compensation when things go wrong. This is cold comfort if you have invested a lot more than this, so is not a particularly convincing argument for going witha regulated fund as opposed to an unregulated one.

There has. Been much coverage of this ban of UCITS since yesterday, but I cannot see anything new thatis being reported that was not reported ad infinitum in April March February and January of this year. What is the real reason for rubbishing this type of investment and not others, again and again and again.

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Dennis .

Aug 24, 2012 at 16:05

Who was it that said you should never invest in something that you can't explain to an 8 year old?

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Anonymous 2 needed this 'off the record'

Aug 24, 2012 at 16:12

I know someone who is an Agronomist (crop specialist) who spends his life advising on crops and crop protection. He can see at first hand how yields are developing across thousands of acres but he never invests in soft commodities since he knows that a spell of hot or bad weather at a critical time can devestate yields overnight and cause massive price swings. This is in addition to any external factors such as happenings in other countries. Be warned.

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Alasdair Lawrance

Aug 24, 2012 at 16:51

Paul Eden, re Carbon Trading.

The basic snag with carbon trading is that it's trying to trade something that nobody wants.

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colin grant

Aug 24, 2012 at 18:54

Keydata were giving me a very good return of over 7% pa.until the FSA turned up and closed them down. They closed them down because the Inland Revenue charged them a huge tax bill due to investments allegedly not being approved tax free., which they could not pay. I believe that the FSA have since been putting large amounts of cash in to keep them liquid. A strange act for them you would think. I wish they had left them alone.

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Keith Simmonds

Aug 25, 2012 at 09:27

Unsolicited invitations are coming in thick and fast from firms with posh titles to buy in 'secure high yielding assets' such as self-storage units, Dubai car parks, fine wine and carbon credits. The fast-talking investment brokers can never answer the question about the need for complex corporate structures and why if the deal is really risk-free they don't get the funding from a bank.

These people were probably selling time-shares or green belt land a little while ago and should be steered clear of.

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yellow army

Aug 25, 2012 at 10:16

The Fsa in their consultation paper have missed a very obvious area. Undoubtedly there are some ifas who have been completely negligent in the advice process and much of what is in the Fsa paper is correct. However the Fsa are missing the point that all of the investments that go seriously belly up is because the asset manager is either incompetent or fraudulent. The fact that wine or crops may or may not be a great asset class to invest in is irrelevant. Much tiighter regulation must be implemented on the people who manage and operate these schemes in the first place. This should be done by stipulating that any alternative investment fund must have an Fsa regulated operator who carries out much more rigorous due diligence on the people that run the investments and in the investing process itself. I have seen plenty of examples where you do a simple google search on a key person stated in an information memorandum and listings of fraud or bankruptcy come up. There are too many operators who have very lax procedures that enables very serious problems to arise to the detriment of investors and advisers.

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Jeremy Bosk

Aug 25, 2012 at 11:09

Tim Barnes

You have the right of it. The FSA exists to provide false reassurance and make life difficult for honest people. Adding layers of expense and inflexibility helps no one. If the senile and dim witted cannot give their money to fraudsters, they will throw it away at the bookmakers and casinos. So why bother?

The time and effort would be better invested in teaching people to do their own research (as suggested by yellow army) and dinning into their heads that if it sounds too good to be true then it probably is too good to be true.

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Jeremy Bosk

Aug 25, 2012 at 12:22

Just read Lex on this subject:

http://www.ft.com/cms/s/3/2a38e880-edfe-11e1-b0e4-00144feab49a.html#axzz24W0Uqm1f

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Festinalente

Aug 25, 2012 at 17:40

Absolute nonsense to ban all collectives that are not regulated by the FSA. Plain vanilla funds should be exempted - US collectives are extremely well regulated. Anyone who owns them has access to the US regulators and can apply for compensation if there is any fraud involved. Many of these funds and the managers who run them are the best in the business and all investors should have access to them. The propectus which must be delivered with any purchase of these funds covers all the risks (systemic and non systemic) factors in minute detail.

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Jeremy Bosk

Aug 25, 2012 at 19:18

Perhaps there should be a test for investors that has to be taken online or at the office of an FSA approved IFA who can print it out for those who have no access to a computer. 20 per cent of the marks should be deducted for no access to a computer because these days adequate research mandates a computer.

The test should be designed by humans but with the questions varied by a computer. E.g sometimes it might ask "In which continent is China / India / Nigeria / Brazil / Paraguay?". Or simple arithmetic with the starting numbers picked by a pseudo random number generator. Percentages and means should definitely be included. Those who cannot distinguish between a percentage and percentage points should have a suitably humiliating sign printed and hung around their necks. Then a few IQ type questions, some comprehension tests etcetera. The test should be headed "Prove you are not an illiterate and innumerate moron".

Those who fail should immediately be removed from all positions of responsibility or authority including for example holding a driving licence or credit card. Their children should be taken into care. The test sub heading should of course be, "Proceed at your peril". Resits would be allowed every five years to allow the educationally challenged to go back to school.

Then of course make it illegal to deal with people who do not pass the test except through court appointed competent persons.

In fact such a test should be administered to the entire population. No pass, no vote.

All workers in the financial services industry would have to pass before beginning work. But additionally they would be tested for being psychopaths, sociopaths or lunatics. So many problems would simply go away.

The possibilities for improving public and personal welfare are enormous. We would thus reduce the need for any other type of regulation and free enormous funds for education and health.

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Neville Byrne

Aug 26, 2012 at 20:34

Does UCIS include "Enterprise Investment Schemes" and/or "Venture Capital Trusts"????

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Anonymous 3 needed this 'off the record'

Sep 04, 2012 at 12:17

As it stands, the proposed ban catches ETPs where they are not structured as funds and have reference assets that are not mainstream financial indices, i.e. ETCs.

So no more ETCs for retail investors.

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Jeremy Bosk

Sep 04, 2012 at 12:29

Covered Warrants?

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