Advisers and Sipp providers are being told to look out for dodgy investments dressed up as standard assets, a phenomenon the Financial Conduct Authority has stated is on the rise.
In a note released today (24 January), the FCA said it had observed scammers becoming "increasingly sophisticated", disguising highly risky investments as standard, safe products.
The regulator separated scams into the classes, or "generations".
The first generation of scam - the oldest - was simply marketing unregulated, illiquid, risky physical assets directly to investors.
The second generation was creating a special purpose vehicle (SPV) to acquire these unregulated physical assets, using funding raised by the issue of corporate bonds.
The third and most sophisticated generation of scam, the regulator said, was the use of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor.
This portfolio would then invest in SPV bonds.
The FCA's warning is particularly relevant to those using Sipps.
In September, the FCA introduced strict capital adequacy requirements for Sipp providers offering non-standard assets.
As a result, a large number of Sipp providers opted to stop offering non-standard assets rather than put aside the extra capital.
But the FCA's latest warning revealed scammers were adjusting to the new regime by disguising unregulated investments as regulated ones.
The FCA urged providers and advisers to make an extra effort to identify whether an asset is "standard".
This, according the regulator's guidelines, means it "must be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days, whenever required".
"A failure to understand which assets are non-standard may leave a firm vulnerable to exploitation by third parties, and we re-emphasise the need for firms to conduct – and retain – appropriate and sufficient due diligence," the regulator stated.
The FCA listed some of the signs that a supposedly standard asset is not what it seems.
For securities listed on a regulated trading venue, providers and advisers should ask: How marketable are the securities? Is your holding of the asset material, and if so will that have an impact on your ability to sell it? What would happen if a large number of investors tried to sell their securities at once?
For corporate bonds and other fixed interest securities with guaranteed early redemption deals, the FCA urged providers and advisers to ask how the product's liquidity was funded and how often it had been used.
It also urged advisers and providers to find out the identity and financial capacity of the counterparty.
james.fernyhough@ft.com
