Regulation  

Maximum 10% holding already key for past business reviews

The regulator’s proposal that only 10 per cent of a retail investor’s portfolio should be invested in ‘crowdfunding’ is good practice for any kind of complex investment and is already a key reference point for past business reviews into advice suitability, Thistle Initiatives has said.

Yesterday (24 October) the regulator published a ‘crowdfunding’ consultation paper which proposes that non-sophisticated investors should certify they will not invest more than 10 per cent of their portfolio - “excluding their primary residence, pensions and life cover” - in unlisted shares or unlisted debt securities.

The paper also stated that other than sophisticated investors and high net worth individuals, all retail investors should receive advice before investing in crowdfunding schemes do to the high-risk nature of the underlkying, start-up businesses.

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Speaking to FTAdviser, James Dingwall, director at compliance firm Thistle Initiatives, warned advisers would typically sit within these portfolio limits when looking at any complex investment for a non-sophisticated client.

Mr Dingwall added that this was the rule of thumb introduced for unregulated collective investment schemes as long ago as 2008 and that his firm uses this to assess advice suitability relating to complex investments for esoteric investments.

He said: “For us and our clients the 10 per cent limit on non-mainstream investments is nothing new and was in reality brought in around 2008 when the issues started around unregulated collective investment schemes.

“When conducting suitability assessments as part of a past business review or enforcement actions, we have used the 10 per cent limit a number of times to assess whether or not the individual has too much exposure in their portfolios to non-mainstream investments.”

Mr Dingwall added that firms who advise non-sophisticated investors without real justification to go above the 10 per cent limit may be pushing the suitability thresholds too far and they could be open to exposure.

He added: “Even though the FCA does publish guidance on such matters through its ‘good and bad practice papers’, firms feel it’s like driving down a road that’s had a 60mph speed limit for the last five years, the regulator then changes it to 30 and gives you a speeding ticket for each time you exceed prior to the increase.

“Even though the consultation paper is meant for the crowdfunding industry it should also be read by the IFA industry as it gives a good idea of the regulators thinking in respect of suitability.”