Looking out for the retail investor

Looking out for the retail investor

It is more than two years since the Financial Conduct Authority (FCA) extended its rules relating to the promotion of unregulated collective investment schemes (Ucis) to retail investors, emphatic in its view that ordinary consumers are vulnerable in the face of such products. 

In basic terms the expanded restrictions mean that a regulated firm cannot promote a group of similar asset classes known as non-mainstream pooled investments (NMPIs) to the majority of retail clients. NMPIs include Ucis as well as qualified investor schemes, traded life policy investments and special purpose vehicles. Although the restriction relates to the promotion of NMPIs, it is likely to extend to advice too (as advice necessarily involves a promotion).  

With NMPIs, the bar is high in terms of compliance processes and firms must meet this challenge head on.

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Although there is a broad exemption for non-retail clients in the FCA Handbook (see the Conduct of Business sourcebook, COBS 4.12), there is a much narrower range of exemptions for retail clients who can be advised on this asset type.  Most advisers will be interested in exemptions relating to the following groups of retail investors:

• certified high net worth investors, 

• certified sophisticated investors, and 

• self-certified sophisticated investors.

The firm must show it has taken "reasonable steps" not to promote an NMPI to an 'ordinary' retail client (that is, those to whom an exemption does not apply) or has directed an NMPI at clients in a way that has been designed to reduce the risk of an ordinary retail client engaging. The detail of COBS 4.11 is important in this context. 

Simply complying with a financial promotion exemption is not of itself sufficient to meet a firm's regulatory obligations. The firm's compliance officer must certify that any promotion complies with the FCA rules on NMPIs and in doing so the record must cite which exemption was relied on and on what basis.

Added to that the firm must take reasonable steps to establish a client actually falls within the exempt category relied on.  A key challenge then is to ensure that the firm works with the client to demonstrate their category appropriately and not just rely on self-declaration – for example, a certified high-net-worth (HNW) investor is a client that has certified their financial position, but COBS 4.12 requires a firm to take reasonable steps to assess that is correct.

Accordingly, firms must have in place the relevant certificates, fact-finds, and evidence.  

Firms should also ensure procedures build in, as part of client take on and file review processes, the signing of HNW/self-certified sophisticated investor certificates (for applicable clients), and the timetabling of certificate renewals.

Assessments for certificates must be undertaken with due skill, care and diligence. This requires firms to look at the substance of a client’s ability to take a proper decision, not just at the form of an exemption certificate.