Regulation  

New Ucis rules: Playing with fire

    CPD
    Approx.0min

    In June, the City regulator published its final rules for new restrictions on marketing unregulated collective investment schemes and certain “close substitutes” to retail.

    The restrictions are slightly narrower than originally proposed by the FSA in 2012 but will still have a significant impact on adviser firms and investment managers alike, restricting them from marketing certain products to individual customers unless they are high net-worth or sophisticated.

    The new rules will come into effect on 1 January next year and there are no transitional provisions so firms will need to be ready in good time.

    Article continues after advert

    Currently, authorised firms are prohibited from marketing unregulated collective investment schemes unless they do so only within an exemption under either:

    • The Ucis order, that is the Financial Services & Markets Act 2000 (Promotion of Unregulated Collective Investment Schemes) Order 2001– (exemptions include generic promotions and promotions to investment professionals and existing participants in schemes); or

    • Cobs 4.12 - exemptions include existing participants in a similar scheme, clients (retail or otherwise) for whom the Ucis is considered suitable, eligible employees, professional and eligible counterparty clients and people who have been assessed as being capable of making their own investment decisions and understanding the risks involved in a Ucis, have received a required warning and who have provided a statement that they acknowledge Ucis can be marketed to them.

    Failure to have the necessary systems and controls in place to prevent unlawful marketing risks penalties which may be imposed by the FCA using its substantial disciplinary toolkit. Plus the client mis-sold an unregulated scheme can sue for damages for the breach of the statutory prohibition.

    Under the new rules in the FCA’s Policy Statement 13/3, Cobs 4.12 has been replaced wholesale with a new version which no longer relates solely to Ucis but extends to a new category of “non-mainstream pooled investment”.

    The main thrust of the new rule is that firms must ensure:

    • When they promote a Ucis or another non-mainstream pooled investment they only do so in a way that makes it likely retail clients do not receive it; and

    • That the only recipients of an non-mainstream pooled investment promotion are permitted recipients for the purposes of Cobs 4.12.

    The FCA’s new rules impose restrictions on marketing Ucis but also include similar investments under a new definition of non-mainstream pooled investment. While the scope of the definition of non-mainstream pooled investment is narrower than initially suggested by the FSA when it mooted the ban on marketing Ucis and close substitutes, the changes will still have significant impact. This is because the Ucis restrictions are extended to new categories of investment which are not Ucis, such as traded-life policies and securities issued by special purpose vehicles.

    Take for example the inclusion of securities issued by SPVs as NMPIs. Up to 1 January 2014 a structured security issued by an SPV would not actually be restricted from sale to retail although there would always be questions about suitability/appropriateness and understanding of risk. By contrast, post 1 January 2014 it will only be possible for financial advisers and managers to promote such a security to retail if the assets being pooled within it are limited to shares and/or bonds. Instruments which expose the investor to speculative or exotic assets such as gold or forestry assets will be NMPIs and can only be marketed to “permitted recipients” under the new Cobs 4.12.