Handle Ucits with care
The FSA has reviewed how adviser firms sold unregulated collective investment schemes as long ago as July 2010
In a guidance document published April 2012, the City regulator strongly recommended that traded life policy investments should not reach the vast majority of retail clients. The FSA is now looking at the rules around the selling of Ucis, including TLPIs. The April guidance is an interim measure while it consults on a ban on all marketing of TLPIs to the vast majority of retail clients.
The 2010 review identified issues about how firms sold Ucis. The main concerns were firms’ lack of awareness of the statutory restrictions on the promotion of Ucis to the general public, firms’ lack of understanding of the Ucis market and their risks; and Ucis being promoted and recommended to customers who were not eligible for this type of investment.
The existing rules already provide for a ban on the marketing to the vast majority of retail clients. Authorised persons are prevented, under section 238 of FSMA, to promote or market Ucis to retail investors or the public at large. Section 238 precludes an authorised person from communicating “an invitation or inducement to participate in” a Ucis unless there is an exemption. This section severely restricts the financial promotion of Ucis to retail clients. Communicating is not only advertising; it covers a wide range of activities including personal recommendations, seminars and websites.
The current rules certainly allow Ucis being promoted to retail clients but only within the permitted exemptions. The trouble has been that unfortunately some advisers have not appreciated that there was a restriction and have not followed the requirements to make sure that their retail clients came within an exemption. There are two sets of complex exemptions.
Promotion of Ucis to retail clients is allowed if an exemption exists under secondary legislation, namely the CIS Exemption Order or under Cobs 4.12.
Typically the CIS Exemption Order exemptions cover certified high net-worth individuals, certified sophisticated investors and self-certified sophisticated investors. Such persons must have a current certificate that they are sufficiently knowledgeable to understand the risks associated with participating in a Ucis. The high net-worth and self-certified exemptions only apply to shares in unlisted companies and not most forms of Ucis.
Alternatively advisers can apply a Cobs 4.12 exemption where the client has the necessary expertise, experience and knowledge of Ucis, and is warned of the lack of protection of the Financial Ombudsman Service and the Financial Services Compensation Scheme, and the risks.