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FSA warns IFAs on unregulated investment schemes

The FSA has warned IFAs about the regulatory dangers surrounding unregulated collective investment schemes, with 11 firms facing restrictions in this area.

The regulator says its research of 185 IFA firms has led it to conclude that the vast majority are not aware of their regulatory responsibilities in this area. The FSA says many advisers wrongly believe that as UCIS are not regulated by the FSA, FSA rules do not apply. The FSA says the advice is regulated even if the scheme is not.

The study found some IFAs are promoting these products to members if the public, despite the restrictions surrounding this.

The FSA says its study found poor quality advice and poor risk management procedures to check whether customers are eligible to be sold a UCIS. In 74 per cent of cases, the regulator found evidence of unsuitable promotions to customers. In 52 per cent of cases the suitability of advice was unclear and in 22 per cent it was unsuitable.

A UCIS is a scheme where customers’ money is pooled together to invest in a range of different enterprises.

So far 11 firms have stopped advising, arranging or otherwise promoting UCIS because of variations to their permissions. These firms are now required to appoint skilled persons to review their promotion of UCIS.

Four of the 11 will have to appoint a skilled person to review their quality of advice. Discussions are ongoing with the enforcement division about whether further action will be taken against three of these four firms.


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. Fools and other people's money 28th July 2010 at 11:10 am

    It never ceases to amaze me how stupid some people are, regulators included.

  2. Presumably, then, the clutches of the FSA extend to advice given by advisers who were taken in by the Stirling Mortimer pitch.

    And, from there, we might posit that were anyone to give anyone else any sort of advice on any financial product or strategy, in any capacity, and it turned out badly, the person who had been (mis)advised could report the person from whom they’d received that advice to the FSA for providing financial advice on an unregulated product in an unregulated capacity. Whereupon one of Hector’s Hatchet Squads would be duly despatched to bring the miscreant to justice and then we’d see a picture of Margaret Cole crowing about how the FSA will absolutely not tolerate this sort of thing, etc, etc, etc…….

    At this rate, we’ll be seeing the FSA’s dementors descending on car dealers for selling people cars that they find subsequently they couldn’t really afford and the guilty party will be slung into Azkeban prison for a period of the FSA’s choosing.

    Crazy ~ and extremely worrying.

  3. UCIS? – correct me if im wrong but should this not be UCITS (Undertakings for Collective Investments in Transferable Securities – EU Directive) – apologies for splitting hairs, but in the context of the article a fundamental point?

    Come on MM, your better than this :-)…I wonder if you’ll publish this one?

  4. Alasdair Sampson 28th July 2010 at 11:46 am

    This article concerns me very greatly indeed as I am currently representing 4 separate IFA firms in various parts of the UK in FSA investigations into their promotion of UCIS.

    I have to assume that that my 4 IFA clients are amongst the firms referred to in this article.

    If that is the case then it is hard not to conclude that the FSA has not already made up its mind about the outcome of each of these investigations – including my 4 IFA clients nothwithstanding that in two cases the investigation process is still with FSA Supervision and I am only at the stage of responding to the Supervision Team’s report!

    This rather calls into question the manner in which they investigate and their impartiality.

    As part of the thematic review the FSA required every IFA to answer an online questionnaire about its promotion of UCIS. There are, I believe, 17,000 FSA authorised firms in the UK, the majority being directly authorised IFAs and ARs. The FSA thematic review has looked at 185 of these firms – that is, 1.08%. According to this article n 74 per cent of cases, the regulator found evidence of unsuitable promotions to customers – that means in 74% of the 1.08% , i.e. in 134 firms. One wonders at how accurate an overall picture a sample size like that will produce.

    Generally speaking you are prohibited by Section 238 of FSMA 2000 from “promoting”, ie selling or advising on sale, UCIS unless one of several exemptions apply. They are too long and detailed to go into here.

    In one case I am handling the FSA have required a Skilled Persons Report – hugely expensive – and they are seeking to restrict it to consideration of only one specific UCIS exemption available to my clients when they know full well that my clients used a different exemption in each case. One has to ask whether that is because the FSA officer doesn’t understand the rules, or is seeking to ensure that the Report has a negative impact.

    FSA Supervision Visits will be informal and on first name terms. They will not take any notes and it’s a friendly discussion. Please do not be lulled into a false sense of security!

    I was in attendance at a Supervision Visit to an IFA a couple of months back. I took almost verbatim hand written notes of 7 hours of meeting – unlike the FSA compelled interview they do not tape these meeting s and produce transcripts (but don’t let that fool you) – in which I have noted the FSA officers as making all sorts of complimentary comments and indicating approval of the UCIS promotion by my IFA client. We then got their report – I had to wonder if I had been at the same meeting!

    If you have been promoting UCIS to your clients then you are at risk of a visit from Supervision. If you get a notice of such a Visit you need immediate advice – and please, not from your compliance adviser! I have one IFA client in investigation precisely because of the bad advice for their compliance adviser! Comliance advisers advise on complaince. The don’t defend, I do.

    Would you let yourself be interviewed by the police about a serious criminal matter, even if you didn’t do it, without a alwyer present?

    Phone me 01560 322191 or email me

  5. Neil F Liversidge 28th July 2010 at 12:04 pm

    I’ve had the dodgiest imaginable UCIS promoted to me by another IFA. I’ve warned him off in the strongest possible terms but he’s brain dead and won’t listen. Sooner or later he’ll end up fined and banned. The story that goes with it is fantastic – literally. Supposedly it was started by the US government after WW2 and raises money for good causes whilst funding the CIA on the side. I know of two other IFAs to whom it has been promoted and they are as stunned as I am that the regulators miss scams like this.

  6. Sadly I have seen cases where IFA’s have been promoting un-regulated investments thinks that because they were un-regulated were beyond the scope of FSA rules. They didnt realise that because they were giving advice FSA rules applied.

  7. I have just read Mr Sampson’s comments with interest.

    As a Compliance Manager who has just successfully steered his firm through the above review without any problems legal advice is only required if you haven’t done your job properly in the first place.

    Understand the product, understand your client, follow the rules.

  8. You must be joking 28th July 2010 at 12:40 pm

    I’ve seen the same ‘scam’ as Neil, but it wasn’t put to me as a UCIS.

    I had a meeting with 3 extremely wealthy clients and 2 ‘advisers’ and ended up asking the ‘advisers’ to leave and telling the clients that if they got involved I’d disown them!!!

    To my mind, the plan looked like a pyramid scam, although they had paperwork purportedly metioning Pannone in Manchester (maybe the FSA should have a look at them!)

  9. David Rangeley 28th July 2010 at 1:09 pm

    I have no problem with this. I act for 120 investors who were promoted faulty film partnerships in 2003 and 2004, in many cases by well-known IFA groups. The advisers appear to have done nothing to assess the investment and tax risks, let alone articulate any risks to the investors. They broke the rules on financial promotions and also advice. I know that there are other film partnership action groups out there and litigation past and pending. We have already had two successful FOS rulings and have about 45 other cases ready to go.

    So it is no surprise that the FSA are concerned.

  10. Caveat emptor.

    It never fails to surprise me how many IFA’ s /Tied Agents are taken in by fantasy non regulated investment schemes.

    About 7/8 years ago a large IFA group was being offered to us for £1. The reason for the nil value was the company could not obtain Professional Indemnity Insurance, as a number of their top AR’s had been selling non- regulated Guaranteed Income Bonds.

    The company promoting these products took £253 million of clients money via regulated sales channels and vanished when the guaranteed income was due to be paid. Here we are 7-8 years on and nobody has learnt a thing.

    It’s not rocket science to police this, the RMAR of all regulated businesses asks for details of all non regulated incomes/commission, how hard is it to obtain detail of the non regulated income?

    Lee Birkett

  11. Andrew Harwood 28th July 2010 at 5:20 pm

    I abhor poor selling and failing to advise clients of the dangers of investing in all types of investments whether regulated or otherwise. Nevertheless, the FSA cannot impose any sanction on a regulated advisor selling an unregulated product or it would not be unregulated.

    Does the FSA also consider it a duty to judge a regulated individual when he is selling his car or his house if he did not apply the risk warning that the roof could collapse if an aeroplane lands on it. Or the car may not be driven if it runs out of petrol.

    It would be good to see the FSA doing their job efficiently and fairly in areas that do require regulation. I would add that this issue does not concern my firm personally as we have never sold these products. Any member of the public who are victims of dishonest selling can use the courts to gain recourse and that is why they are called unregulated.

  12. “… the FSA cannot impose any sanction on a regulated advisor selling an unregulated product or it would not be unregulated.”

    That’s probably why the UCIS framework is statutory rather than regulatory then – if you’re not inside the exemptions, it’s a breach of the general prohibition, which is then sanctionable (whether or not you’re regulated). BTW, the relevant test is ‘promotion’ not ‘selling’, there’s a difference.

    And ADVISING on a designated investment (which includes UCIS, read the Regulated Activities Order) is within the FSA’s perimeter.

  13. Thanks Adam, that was explained with clarity, to some of us.

    All this stems from a conversation last December, it makes you wonder what the supervisors do on a daily basis, being unable to spot trends puts the regulator at a bit of disadvantage when it comes to meeting its statutory objectives!

  14. I’m a bit confused, because I’d thought the FSA doesn’t regulate products (aren’t a number of people calling for it to do just that?)

    Rather, it regulates advice on certain classes of financial product such as collectives, pensions and mortages, etc.

    Yet now, it seems, the FSA has decided that it can step in and claim to be the regulator of advice on pretty well any financial product which catches its eye. Okay ~ so just what’s the definition of a financial product which isn’t “regulated” (whatever that may mean) per se, but on which the provision of advice IS regulated by the FSA?

    And are there any unregulated financial products, advice on which doesn’t fall within the FSA’s regulatory remit?

    Surely there must be set down somewhere something which defines the boundaries of the FSA’s regulatory powers? Otherwise, the FSA is free to intervene in the advice process on any financial product or transaction that it pleases, without recourse to any other body, for example the purchase of a BTL property (not the mortgage on it, mind, but the purchase of the property as a potentially money making proposition).

    Some years ago I advised a client of mine (a self employed IT contractor) not to buy a property (his principal residence) because I knew that he was stretching himself beyond the limit of sensible affordability and that if he ran into any sort of earnings problems, he’d be in serious difficulties very quickly. He ignored my advice and it all went badly wrong. Now, eight or nine years later, at the age of 60, he still has debts of about £30,000 and no equity other than relatively small amounts in a couple of BTL properties up north.

    Now, imagine if I’d recommended that he SHOULD buy that new home because the property market was set to continue booming for the indefinite future, etc, etc. Would the FSA consider me liable for his financial downfall? It seems to me that it could.

    And let us not forget the problems which arose with Split Capital Investment Trusts because the people at the FSA charged with overseeing and analysing them obviously didn’t understand what they were looking at and classified them as low risk.

    No regulator can regulate every conceiveable eventuality. Perhaps the FSA ought to start facing up to that reality and, when faced with an unregulated product going down the pan, just tell the world that said product did not fall within its regulatory remit. It’s called being honest about what you can reasonably do, no matter how much extra staff, money and powers Adair Turner is forever asking.

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