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Financial services regulation and ethics


FCA’s UCIS decision introduces NMPIs

John Housden

The Financial Conduct Authority (FCA) has finished its predecessor’s work by publishing a final statement on unauthorised  collective investment  schemes (UCIS) and similar products.

Although neither was explicitly mentioned, both venture capital trusts (VCTs) and enterprise investment schemes (EISs) appeared to be targeted in one of the FSA’s last consultation papers (CP12/19, ‘Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes’, August 2012). Finalised rules and guidance were promised “in the first quarter of 2013”.

Although it was the beginning of June when the FCA that eventually issued the UCIS policy statement (PS13/3), the amount of time spent on the statement seems to have paid off for some of the potential issues addressed. It also means the official start date for the new rules won’t be until 1 January 2014.

The statement focuses on yet another acronym to join the regulatory lexicon − NMPIs (non-mainstream pooled investments). NMPIs include not only UCIS but also other product structures “characterised by unusual, speculative or complex assets”. The primary goal is that NMPIs are not promoted to retail customers.

The rules set out a list of ‘excluded securities’ which do not fall within the NMPI category, including:

  • Exchange traded products (ETFs, ETNs and ETCs);
  • VCTs; EIS funds and seed enterprise investment scheme (SEIS) funds that are not structured as a UCIS;
  • Overseas investment companies that fall under the criteria for investment trust status if based in the UK;
  • Real estate investment trusts (REITs); and
  • Securities issued by special purpose vehicles (SPVs) that pool investment in listed or unlisted shares or bonds.

A single EIS company is not a UCIS, and so is also excluded.

The provision of COBS 4.12.1R (4) has been treated as a loophole for the marketing of UCIS, because it permits promotion to people “for whom the firm has taken reasonable steps to ensure that investment in the collective investment scheme is suitable.” This provision will be revoked, but the FCA is going to add to the existing exemptions under the Promotion of Collective Investment Schemes Order (PCIS) and the Financial Promotions Order (FPO).

Using the PCIS/FPO definitions, it will be possible to promote NMPIs to retail clients who are certified as sophisticated investors or high net worth individuals, or are self-certified investors. However, a preliminary assessment of the individual’s profile and objectives must be undertaken before making the promotion to a client in the latter two categories, and the firm may proceed with the promotion only if it believes that the product is likely to be suitable for that client. The FCA makes clear that it is reviewing the current high net worth thresholds (set in 2001) of an annual income of at least £100,000 or investible assets of at least £250,000. It encourages firms to comply with the new rules sooner than 1 January 2014 “…in particular given the significant risk of inappropriate or unsuitable sales to ordinary retail investors, which these rules seek to address.” investment-schemes-and-close-substitutes

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