Four things I learned from the Ucis paper
We look between the lines of the recent consultation paper at the FSA’s concerns and motives, the nature of Ucis and what the Ombudsman saw.
Many have hailed the Financial Services Authority’s proposals to ban Unregulated collective investment schemes as a welcome and even overdue stance on risky, oft missold investment schemes. Let’s take a closer look at what else the FSA’s paper has told us:
1. The FSA doesn’t have a problem with Ucis.
Surely there’s nothing inherently wrong with a risky investment, no matter how wacky it is. Let’s say I get an email saying a certain professor has discovered a new, clean, free source of infinite energy and just needs the money to build a prototype reactor, promising a huge return on a meagre investment when these things go into mass-production. Obviously, I doubt there is any more than a 0.00001 per cent chance of me seeing any return from this quack whatsoever, but who is to say a well-informed investor shouldn’t be allowed to take that chance?
The investor acknowledges the risks and takes responsibility for the potential loss.
The FSA’s emphasis therefore is not on the nature of these “non-mainstream pooled investments” but rather, once again, on the adviser. After all, Ucis are still perfectly available for sophisticated investors: namely a) people who have a varied enough portfolio to absorb loss and b) people who have been informed and understand all the risks.
2. The FSA still isn’t sure what a Ucis is.
The FSA uses the term “non-mainstream pooled investments”, which seems like a distinctly vague term. Some investments are obviously non-mainstream, like investing in unclaimed cemetary plots or unbuilt housing in Guatemala. But where is the line? The ‘unregulated’ is the most important word in the name, because it’s the factor that most easily defines what is and isn’t a Ucis.
But the FSA’s concern is not so much that these things are unregulated, but that the risks involved are not adequately described to the prospective investor. The fact that the investor might not be able to claim compensation is obviously a concern, but if they are well enough informed then that would simply be a consequence of their decision.
That doesn’t seem to match up - the most distinct factor is that these investments are unregulated, and yet the point of concern for the FSA is that the risks aren’t communicated properly. Surely unregulated investments are properly sold while some perfectly legitimate schemes are mis-sold.
3. The Ombudsman is seeing more Ucis complaints
I can’t help but wonder if there could be an element of trying to keep the cost of regulation down as well. In its annual review for 2011/2012, the Financial Ombudsman Service notes that it saw increasing numbers of complaints involving Ucis than before. Is this because more perhaps-not-adequately-informed investors are taking bigger chances on unconventional investment schemes and getting pouty after being burned?