FSA: Ucis rules have been ignored or misapplied

'With product intervention, let me be clear that this power will do what it "says on the tin" - it will allow the FCA to intervene where we feel products have been inappropriately sold or are simply bad products.'

Martin Wheatley

So we are going to move from hindsight to foresight..Good idea..HOW?

Rhiannon Mapps needs to be banned from selling UCIS products to retail clients. That woman is nothing but trouble. I heard on the grapevine that she invested 100% of 10,000 clients' monies into AB2 and then sat back and lolled whilst it went to pot. She did all this whilst riding an old steam train. Disgraceful.

Not all UCIS products are bad what is wrong is the quality of advisers who think they know what they are doing.. Regulation does not guarantee success does it

"... the regulator plans to clamp down on the retail sale of Ucis."

When?

Have to agree with Arthur on this one. There are plenty examples of advisers misunderstanding, ignoring, and misapplying regulated products, e.g. pension transfers, drawdown etc. The FSA are just playing to the galleries. The answer first and foremost needs to come from the adviser and his or her commitment to do the the right thing for their clients. This is an inner conviction and belief that you can't learn in the exam room or be forced by the regulator to adopt. The unscrupulous adviser will always find something to flog their unsuspecting client regardless of the regulator.

Perhaps if they hadn't named them UCIS which is so similar to UCITS there would have been less confusion?

Not sure why they think they know better than the client and adviser. What they do need to do is make the advisers who give poor/bad advice pay when the client makes a reasonable complaint, rather than the rest of us having to bail out the FSCS when the clients 'may' have been left worse off. Sometimes they need to look at the provider of the product and determine if they have misled the adviser and investor and make them pay up.

The UCIS problem is not a problem when the investments are not being targeted at advisers so the provider and adviser can make money but ignores the interest of the client.

It is frankly oversimplistic of FSA to state baldly that UCIS rules have been ignored or misapplied without stating that frequently the lack of understanding and the misapplication of the rules is on the part of the FSA itself.

I have been involved in 5 previous UCIS supervisions and/or investigations and in one current investigation.

The two common threads throughout them all are:

1. the lack of consistent understanding and application of the rules amongst the various FSA officers involved

2. the insistence by all FSA officers that the exemptions that may be applied are all and only to do with whether the client is a high new worth client or is a sophisticated investor, either with the appropriate certificate, and simply ignoring the exemptions under COBS 4.12.

Whether or not a client is a high net worth client is a matter of arithmetic fact – irrespective of the appropriately worded certificate being in place. Whether or not a client is sophisticated is a judgment call in most cases, although there is one factual situation in which a client would be classed as such.

Where the FSA has the real difficulty in understanding its own rules, to say nothing of applying them, is in relation to the COBS 4.12 exemptions.

The interpretation of the COBS 4.12 and their applicability to your promotion and sale of UCIS depends on which FSA officer you get.

I attended a UCIS supervision meeting at which the FSA supervisor argued that you had to issue a warning to the client about the risks of UCIS but without promoting any UCIS, have the client sign a declaration to the effect he nderstood, and only then advise him of the specifics of the UCIS.

I asked if that was not chicken and egg – how could you warn the client of the risks of a class of investment without telling him what that class of investment involved? How would he be able to understand the risks of something the adviser couldn’t tell him about?

He said that COBS 4.12 wasn’t black and white, it was shades of grey.

In another case, in a debate with a skilled person, he conceded that assessing whether or not COBS 4.12 had been complied with was a matter of subjective opinion. FSA accepted that.

In a recorded interview of a client, a senior manager of supervision insisted that the adviser had to record his assessment of the client’s knowledge and understanding before he could carry out the assessment and before he could discuss any UCIS with the client.

How your promotion of UCIS is viewed will depend on the personal understanding and views of the FSA officer.

In every single case I have dealt with, the terms of the supervision report that follows will be full of factual errors, will not represent fairly what you said, and will simply be deliberately skewed to suit the FSA’s own needs.

I attended one meeting where IFA was told that he was “almost there” in his application of the rules, where the term “good practice” was uttered on a number of occasions and even one aspect of his promotion was described as “best practice”. Yet the supervision report that followed was such that I told the IFA that clearly he and I had been at another meeting.

My detailed response to that report was 43 pages pointing out the numerous misrepresentations and factual errors, and referred frequently to the verbatim notes I had taken at the meeting frequently quoting the words of the FSA team leader. Happily, in that case, the FSA went away and never came back.

I give this advice to any IFA who may be selected for supervision review:

1. it is of crucial importance that you have someone, preferably a shorthand write, in attendance making as verbatim a record as possible of the supervision meeting. I cannot stress this strongly enough. Do not trust the FSA – they will distort what you say at such meeting. Ask any IFA who has been subjected to such an review meeting.

2. the FSA’s supervision report is the rock on which the whole of the ensuing procedure is founded. Read it carefully and challenge all and everything in it that is even marginally incorrect or misrepresentative. If you do not then it will come back to bite you.

As in so many things

"The best test of responsible ...

banking, and the best test of it is "how people behave while no one is watching. ...

Barclays chief executive Bob Diamond

So they have a head of 'Financial Crime'!? Why is it that they are not having a SFO investigation into Capita/Arch Cru then? That was as close to it as your going to get! Also if doing financial crime why are the bank chiefs not in the dock? They have allowed their organisations to commit more fincial crime than any IFA?

As far as not understanding. Is that like the FSA not understanding true life settlement funds & making shambolic statements that only serve to create havoc? Maybe they are right as I fail to understand which planet the FSA are on most of the time.

@Alasdair

I think the mis-understanding of the exemptions starts from the top at FSA.

I have posted on an article in the Wealth Manager section: -

http://www.citywire.co.uk/wealth-manager/fsa-clampdown-on-ucis-funds-worries-wealth-firms/a600665?ref=wealth-manager-home1-list

(Sorry cannot be bothered to copy out!)

that the history of the Category 2 exemption shows that it was intended to achieve what it says i.e. to exempt advisers or investment managers using unregulated funds in client portfolios subject to a client agreement.

The FSA has consistently avoided publishing anything that would clarify or explain the use and limitations of the Category 2 exemption - precisely because they know that this exemption urinates on their fireworks.

The recent correspondence to 250 intermediaries on the subject was typical. Ms Woodhall knew full well that she was writing to intermediaries offering a mixture of discretionary and advisory services and that the Category 2 exemption would be the most pertinent. Rather than give guidance on how this works, she merely buried it in the usual heap of collateral and irrelevant exemptions about Church Measures and High Net Worth Certificates.

They are of course due to publish their consultation on the new Rules (by the end of the 2nd quarter, which in FSA timing means about Christmas). Something tells me that the new rules will be worded very differently to the existing ones, but they will no doubt claim that was what they meant all the time...

Maybe if the rules weren't deliberately woolly to allow the FSA to retrospectively apply any action they like to cover their own incompetence, then people might be able to better follow the. Just a thought !!

MiB

Erudite as always.

"Urinating on the fireworks".....you don't mind a spot of plagiarism, I hope?

Dp's IFA

If Tracy M is "Head of Financial Crime", does that make her responsible for this year's FSCS levy!

Here we go again! (Barrack room) lawyers arguing about cat 2 exemptions, COBS 4.12, and the perceived lack of clarity of the regulations, passing the blame for widespread selling of most of these worthless schemes to the regulations.

These rule fetishists, trying to defend the greedy, desperate or plain stupid advisers who sold the preposterous schemes should wake up and realise that the schemes in question were fraudulent, and the perpetrators, both salesmen and scheme promoters, should suffer. If they lose their house, fine. Their liberty, fine.

It is simple really, limit UCIS sales to stockbrokers, not IFAs. With stockbroker sales there is little redress to FOS for losses, although they can be sued for negligence. Either way, I don't pay for others greed.

I can also confirm a replica experience to Alisdair Sampson and Man in Black - it is the FSA who do not understand the rules...as mentioned in their particular points.

I fully accept that advice in the area can be high risk - but not all products are the same. Only the most incompetent advisers cause the majority of issues - most people who use these things do so for pure investment reasons - not crass inducements. Seemingly this is an area which can't be discussed without frothing at the mouth...

It seems impossible to actually use these products with due diligence and appropriately for clients as part of a discretionary portfolio, despite the fact you are allowed to....and the client makes money more often than not. I don't see how that is playing the technicalities - it's pretty obvious the investment manager is the sophisticated investor. Why don't they nail multi-managers nuts to the wall for doing the same thing???? retail investors still end with some exposure.....which apparently they want to avoid at all costs (without trying to tell you what to invest in...pfft)

Perhaps we shall see on Wednesday a more important story from Mr Dimon, when he tells the select committee that the FSA knew they were rigging LIBOR and did nothing to stop it (because they were worried about saving the financial system - which they had failed to regulate)...Oops. Nothing like alleged criminal fraud by our institutions to sharpen the publics mind.....

@Hickky

I assure you that the FSA is attacking stock-brokers and hassling serious wealth managers over this as well. And whilst I think there is a lot of merit in the idea that only firms with certain accredited research capabilities should be able to offer or use certain investments, the context to our obsession over tiresome things like Rules and the law is the context here.

The FSA could have approached this very differently. Quite apart from admitting earlier on that it needed to change the Rules, it could have approached what has been done to date in a balanced, objective and credible way. It could have looked at client portfolios, assessed them properly, and said "This one's OK because of a,b, and c factors, this one has room for improvement because of d,e &f factors, and this one is dangerous and caused the client serious damage...". It could have told smaller firms their research facilities weren't really up to it and set out steps needed to address these - larger firms under ARROW are given what are termed 'Risk Mitigation Plans'. But it doesn't do anything like that...

Instead it comes out with blanket statements about all UCIS being dangerous and high-risk. It accuses people of breaching a statutory restriction it does not itself understand. It publishes Press Statements making aggressive statements about "illegal sales". It sends recent graduates out to real firms, armed with checklists and sets of crayons who stumble around in the dark giving contradictory and ill-thought advice.

That is why they have to be referred back to the Rules.

I imagine that this is what Zimbabwe must have felt like for the first few years - that feeling of some semblance of the Rule of Law remaining and the paraphernalia of the Courts still operating, on the edge of a party machine and armed thugs touring the country...

'With stockbroker sales there is little redress to FOS for losses' .....sounds like the words from someone who doesn't give a monkey's about the client. I suppose if you have NEVER sold a with profit bond, endowment policy or indemnified regular premium savings plan, and NEVER been paid commission you can come out with self righteous drivel !

@ PB2

If you lump a with profit bond, an endowment policy of indemnified regular commission in the same category as Vietnamese eco plant oil, land banks, and other sorry messes some advisers have sold, then I am sorry for you. You fail to see the differences between regulated funds that are able to be researched, obey rules, and are run by firms who wish a long term profitable future, and the shysters who invade the UCIS space. This is not to say all are scams, but should we be advising our clients to invest in them?

I say stockbrokers are the best equipped to deal with these funds, however as MIB has pointed out, they are getting grief over these as well. This is good, as there has been a number of fraudulent stockbrokers in the past, and as I am sure MIB will agree, eradicating them will be good for his business.

Buy the way, I have sold all these things, but never had a complaint or redress over any of them.

As always MIB seems to make so much sense, it is a shame he did not replace Mr Sants at FSA, then maybe we would get sensible regulation.

I do not profess to know much about the rules of UCIS and from reading some comments on other blogs do not believe many IFA’s who have advised on UCIS actually knew the rules before advising on them, however this is hardly surprising given the fact that the FSA themselves seem clueless about the rules they implemented.

Reading a comment on another New Model Adviser story an adviser blogged that not all UCIS were bad investments and quoted two funds – the Mansion Student Accommodation Fund and the Blackmore Branded Commercial Opportunities Fund, now this adviser has obviously recommended these funds and thinks they are UCIS, however having looked at them they both appear to be quoted on the Channel Islands Stock Exchange and therefore are surely just listed securities and not governed by UCIS rules.

Things get complicated within fund management groups themselves the Brandeaux Ground Rent Portfolio Fund and the Brandeaux Student Accommodation fund are both registered in the British Virgin Islands. However the Student Accommodation fund is listed on the Irish Stock Exchange making it a listed security so not bound by UCIS regulation however the Ground Rent Fund is not listed so is a UCIS.

Further complications would arise when you get into MiFID and Non-MiFID regulations.

Non-MiFID advisers are only allowed to promote UCIS promoted by MiFID regulated organisations (UK & EU based organisations).

Therefore any UCIS (as opposed to a listed security on a recognised stock exchange) promoted from Guernsey, Jersey, Isle of Man, BVI etcetera could only be advised by MiFID registered advisers. If the adviser was MiFID and promoted a UCIS is it not the case that the adviser had to have their own accounts audited?

Looking at one of the largest UCIS funds, the EEA life Settlement Fund, this is promoted and operated from Guernsey i.e. a Non-MiFID organisation, then if my simple viewpoint is actually correct then any adviser who was Non-MiFid could not advise on it full stop and if they have are in breach of regulations.

I am sure MIB will correct the errors in my views above, but surely the FSA should just come clean and say they have not provided sufficient guidance in the past, here is a definitive set of rules for the future, and then only investigate past recommendations if the clients actually complain (which will only happen if the client loses money – in which case the adviser is screw*d whether it is a UCIS or not).

Who has the clearest explanation of the rules?

@Alan

Ooh. Well. Be careful about things appearing to be listed...

If a company is a genuine closed-ended vehicle (strictly speaking, whether listed or not), then it is not a Collective Investment Scheme as far as UK law currently stands - Reg.16, SI 2001/1062 refers.

However, the Irish and CISX exchanges explicitly list funds *as funds* i.e. open-ended vehicles. Not withstanding any regulation in their own jurisdiction (and their being subject to Listing Rules), if they are open-ended, they could well be CIS (and hence UCIS if not UK authorised/recognised or authorised in another EEA jurisdiction as UCITS (not to be confused with UCIS!)).

In terms of MiFID, this is also full of a lot of confusion. Basically, in order to be 'MiFID fexempt' under Article 3, a non-MiFID IFA will be subject to an FSA requirement to only communicated orders to entities that are authorised under the Directives. So if Joe Schmoe IFA sends the paperwork directly to the operator of a UCIS, he *could* be breaking this requirement. It is however a fairly ambiguous point though. For example, such an IFA 'communicating orders' via a Platform (which is itself a MiFID firm) probably isn't breaching that requirement.

You very slightly touch on (I think) a very pertinent point about MiFID firms getting their accounts audited...To expand what I suspect might well be your point, FSA's current tendency to manufacture reasons for disliking UCIS includes the one about not having access to FOS or FSCS...Yet we all that if an adviser recommends a UCIS and its goes wrong, a client will be protected by the adviser being subject to FOS, FSCS et cetera. Funnily enough, FSA's earlier pronouncements on UCIS (before its current witch-hunt) recognised this!! Odd how they change their mind when it suits them...

As an aside, I honestly do not know most of the funds you refer to. My gut reaction however is that these are more the types of thing that probably shouldn't be used in any great concentration with 'normal' clients!! (And even if you and I recognised a slice of a portfolio going into a spread of these as a diversifier, I think their ARCH cru reasoning shows that the FSA doesn't understand this logic).

@MIB So what you're saying then is that the FSA will still go for you, even though they're wrong..... what they need is some legal cases going their way about this....any precedent?

Maybe the Greek FSA would say to advisers for clients who want to diversify their risk not to use alternatives and instead invest in to low risk assets like 'risk free' government bonds....guess that worked out well.

Mr Blue

Yes

Rules so complicated even the rule maker doesn't understand them!

To go a step further than what Alan Smith suggests, I think it may well be possible that quite a few intermediaries who recommended these products merely assumed that Unregulated meant that they were outside the scope of any FSA rules. Certainly, Stirling Mortimer implied at a presentation I attended that their property investment schemes could be confidently recommended without fear of interference from the FSA.

Personally, I've never had any clients for whom I've considered any sort of off-piste investments suitable and, even if I had, it would have been necessary to obtain prior approval from our network which very probably wouldn't have been forthcoming ~ thank goodness.

There are very good opportunities in this market for those willing to invest the time and energy especially in a market that is likely to track sideways at best for some time to come. This might be a good starting point coupled with your own compliance check-list

http://www.fsa.gov.uk/smallfirms/your_firm_type/financial/pdf/ucis_factsheet.pdf

@ hicky

You fail to see the differences between regulated funds that are able to be researched, obey rules, and are run by firms who wish a long term profitable future, and the shysters who invade the UCIS space.

what funds do you mean, Arch Cru,, Key Data,, all regulated,,all gone pop !!!!

@Philip

Same shysters who invade regulated space?

@ phillip

As you well know (but you ignore it just to big up your argument) the instances of shysters in regulated space are very low, although they do exist, and should be prosecuted for fraud.

Fraudulent activity in UCIS space should also be prosecuted, but exceed regulated by a huge margin, and the concerns of the regulator are justified. UCIS should only be sold by Stockbrokers, not advisers.

It also appears you are unable to understand the English Language. I stated firms that are able to be researched, obey rules and wish a long term profitable future are demonstrably different and do not include Arch Cru or KeyData, as they either broke rules or were not set up for a long term profitable future.

Ucis is a good example…there are already rules in place to prevent these products ending up in the wrong hands. But they have been widely misunderstood, ignored, or misapplied. So more radical action may be called for,’ she said.

A good starting point would be to write the RULES in plain English. That way they would not be misunderstood, ignored or misapplied.

To do this will require a modicum of common sense, which is the only lacking in Canary Wharf.

@Alisdair Sampson - could you tell me the legal precedent?

What is the implication for discretionaries, or firms which are dual advisory/discretionary?

thanks

Mr Blue

I responded “yes” to your query: the FSA will still go for you even if they are wrong?

I was not thinking of any particular case.

In my experience from the cases I have dealt with and am currently dealing with they will undertake regulatory proceedings even where that is unwarranted.

In fairness, I have had a couple of supervision cases where we argued to the FSA and they listened – and they were managed out and resolved.

The subject of the investigation is really immaterial – it’s the mindset and the process I was commenting on.

By precedent I assume you mean a case where the target IFA/firm has challenged the FSA either in the Upper Tribunal or on judicial review and won.

There are regular reports in this journal and elsewhere online of tribunal and court cases where authorised firms, generally the bigger firms with resources and deep pockets, feel sufficiently strongly and aggrieved at the FSA’s processes and decisions that they litigate and win. Often they do not.

Ask me the same question in 8 months time when 2 current cases I am handling before the Tribunal have been heard and decided. Naturally, in both, I am of the view that my clients are right and that the FSA’s processes have been flawed, misguided and have reached unfair and unfounded decisions.

But I would say that, wouldn’t I?

Rules in plain English from the FSA? The FSA rulebook is reportedly 10,000 pages and yet still we see pile-up after pile-up after pile-up so, after 20+ years of regulation, rules obviously haven't had the desired effect. Yet, for all that, there has to be at some sort of template for best practice.

As members of a good, financially strong and well resourced network, we receive monthly compliance updates which are basically relevant distillations from the latest boatload of...... stuff pumped out from Canary Wharf. These monthly bulletins help us to keep to the straight and narrow path of righteousness and, more seriously, to minimise the risks of taking any costly wrong turns for which we might find ourselves professionally castrated a year or two down the line.

Oh, but the FSA will say, we produce quarterly bulletins available to view online ~ yeah, 80 pages apiece (on top of everything else with which we have to try to keep up) and, by all accounts, pretty turgid reading. As members of a network, we're largely buffered from the FSA (regulation by proxy, with no discounts, but that's a gripe for another day), but there does seem to be a very distinct lack of constructive, interactive dialogue between the regulator and the regulated.

I thought Peter Smith talked quite a lot of sense. I could understand what he was saying and the logic of it.

So why doesn't the FSA use a tiny bit of its monumental budget to create a website for each sector of the regulated community, on which it would post a monthly newsletter, a regulation round-up or something similar? Interested parties could write in to request clarification from and interact with those who've written it. They could point out perceived flaws or oversights (all subject to moderation, of course). They'd (hopefully) be able to undersatand better where the regulator is coming from on a particular issue.

Consultations on particular proposals could be conducted in open forum, with all submissions freely available for all to view and to comment upon.

The problem, I suspect, is that the FSA's attitude towards those it regulates are that we're all just the errant Great Unwashed and worthy only of diktats rather than helpful two way dialogue. The FSA claims on its website to be an open and transparent regulator, but really that's nothing but a bit of mendacious window dressing.

Still, the TSC really does seem to be getting stuck in to bringing the FSA to book, so we can only hope that process continues and that the Committee continues to turn the screws ever harder. Andrew Tyrie doesn't seem to be just a wimp in a suit any more.

@ hickky

i do not disagree with you hicky,but any fund or firm can go bust,,look at northern rock,,and honister network.,,M F global (stockbroker) pritchards,( another stockbroker)

regulated firms have caused as many problems as unregulated firms (equitable life,,etc) ,,

cast iron and concrete rules should be laid out by the fsa on UCIS then there would be no question on if they are suitable or not.

i am just being the devils advocate again,,,

I have heard that there is a company called C.I.P who will transact UCIS business for advisers on an introductory basis - does anyone have any experience of them or know who's involved or how it works?

@James

Not quite. CIP 'promote' UCIS schemes after conducting due diligence, but refer anyone needing advice to 'specialist advisers'.

Its basically run by a bloke called Bob Massey, who first found fame running 'Heartland Independent Advisers' into the ground about a decade ago. He's also involved in 'will writing'. He's certainly not stupid but tends to follow a passing hurse.

Thanks for the info Man in Black...I'll give it a miss.