The FSA has warned advisers about the suitability of unregulated collective investment sch-emes after exposing the advice failings of the latest firm to be sanctioned over Ucis sales.
Former directors of Best Adv-ice Financial Planning Paul Banfield and Anthony Moss were last week banned from holding any significant influence function.
Banfield, a well known media IFA whose broadcast experience includes commentary for the BBC and Channel 4, was also fined £10,500 and banned from being an investment adviser.
The FSA visited Best Advice in February and March 2009, prompting an investigation into Banfield’s and Moss’ conduct in July 2009. The regulator found no evidence to demonstrate that Best Advice had complied with Ucis promotion rules.
Under section 238 of the Fin-ancial Services and Markets Act, Ucis cannot be promoted to the public by authorised firms unless the scheme is an authorised unit trust scheme, a scheme constituted by an authorised open-ended investment company, a recognised scheme or falls under other exemption rules.
The FSA identified at least 22 customers who were advised by Best Advice to invest in one Ucis or more. Banfield was the advi-ser in 13 of the 22 cases reviewed.
The final notice against Banfield cites three cases which demonstrate the failings in his advice. In two out of three of the cases, clients were advised to invest 80 per cent of their funds in Ucis, one of whom was an 87-year-old woman. In the third case, clients were advised to invest 70 per cent of their funds in Ucis.
Best Advice went into liquidation in August 2009 and was declared in default by the FSCS in July 2010.
The FSCS has received 31 claims against Best Advice to date and has paid out a total of £250,000 on nine claims. Nine claims have been rejected, with the rest still to be decided.
FSA head of retail enforcement Tom Spender says: “Ucis are rarely suitable for retail inv-estors. Many are characterised by a high degree of volatility, illiquidity or both and are therefore usually regarded as speculative investments. Even when they are recommended, they are unsuitable for anything more than a small share of a portfolio.
“We want firms to read the details of this case, along with the findings of our review, and learn from them. We have seen a proliferation of firms offering Ucis so it is vital they do their homework before recommending these schemes.”
The small firm’s section of the FSA’s website contains guid-ance for IFAs on the use of Ucis
In January 2007, Mr and Mrs B were advised to encash five existing investments and to reinvest the proceeds into a collective redemption bond with a company in the Isle of Man. The FSA says there is no evidence that Banfield conducted an assessment of Mr and Mrs B’s existing investments before making his recommendation.
The FSA says Banfield failed to explain adequately whether the series of recommended transactions were necessary and offered any benefit and failed to make clear the costs involved in switching from their existing investments into a new one. No analysis was set out in the suitability letter to demonstrate the performance required to achieve the same level of return as their existing investments.
Banfield recommended Ucis funds and when the recommended transactions had been undertaken, 70 per cent of the amount inves-ted in the CRB was invested in Ucis. The FSA says there is no evidence on file to demonstrate that the section 238 restriction on the promotion of Ucis was considered by Banfield, with no evidence that Mr and Mrs B had sufficient knowledge or experience to understand the nature of the Ucis recommended to them, and the associated risks.
In the case involving the 87-year-old woman referred to as Mrs A, Banfield recommended that existing investments should be encashed and reinvested in several UCIS through an offshore investment bond. Mrs A’s inheritance tax planning requirements were to be met through a discounted gift trust. Banfield advised Mrs A to encash her investments before the provider had agreed to underwrite the client for the DGT. The application for the DGT was then rejected.
The costs and charges of the transactions were over £65,000. The FSA says that given Mrs A’s age, it is unlikely these costs would ever have been recouped.