OpinionJun 26 2013

Looking out for ordinary retail investors

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From 1 January 2014, the FCA will implement new rules on unregulated collective investment schemes and close substitutes for ordinary UK retail investments.

This follows on from the FSA’s consultation on banning the promotion of Ucis and close substitutes in relation to ordinary retail investors. The FCA is now recommending that firms affected by the new rules consider, before the end of the year, what changes, if any, they need to make to their systems.

The final rules are contained in the FCA’s policy statement PS13/3, published this month.

Regulators have always had serious concerns about this type of investment being promoted and then mis-sold to ordinary retail investors at particular risk of inappropriate promotion of ‘non-mainstream pooled investments’. The new rules will be of interest to product providers offering these NMPIs or access to them through wrappers; discretionary portfolio managers who may include NMPIs in portfolios; providers that create NMPIs; and anybody involved in their distribution.

In its supervisory work conducted in 2010, the FSA found that most retail promotions and sales of Ucis reviewed were inappropriate and failed to meet existing requirements, exposing ordinary retail investors to a significant potential for losses. The FSA then took a series of enforcement cases against firms and individuals who did not heed to FSA guidance, yet standards did not improve. As a result, the FSA proposed changing restrictions that already applied to the promotion of Ucis to strengthen the regime.

Currently, the Conduct of Business Sourcebook 4.12.1R(4) category 1 allows firms to promote Ucis to people who are already participants in a Ucis or who have been in the last 30 months. The new rules have been drafted so that firms may continue to provide advice on existing investments and whether they should be retained or sold. The new marketing restriction simply stops the promotion of further investment.

Currently, Cobs 4.12.1R(4) category 2 allows firms to promote Ucis to people for whom they have assessed the product to be suitable. The FCA has said that it has found that this category is the most often used exemption for inappropriate promotion of Ucis to retail clients, with many firms appearing to regard exemption as allowing promotion to any retail client so long as advice is given. This exemption is being removed in general for promotions to ordinary retail investors.

The FCA has confirmed that it is taking forward a more limited approach than the one proposed by the FSA in its consultation paper and it will be “calibrating” its focus on products of greater concern. This means that some products will not be within the restrictions, including:

- Securities issued by special purpose vehicles that pool investments in listed or unlisted shares or bonds.

- Exchange-traded products.

- Overseas investment companies that would meet the criteria for investment trust status if based in the UK.

- Real estate investment trusts.

- Venture capital trusts.

In addition, enterprise investment scheme funds and seed enterprise investment scheme funds that are not structured as Ucis are also outside the rules.

Units in qualified investor schemes, traded life policy investments, units in Ucis and securities issued by SPVs pooling investment in assets other than listed or unlisted shares or bonds will be subject to the new marketing restrictions.

Philip Ryley is a partner and head of financial services and markets for solicitor firm Michelmores