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FSA’s UCIS restrictions missing some detail

The FSA has been reviewing the invitation list for the pooled investment party and thinks it is over-subscribed.

Increasing numbers of retail investor have been jumping into the shark-infested waters of unregulated collective investment schemes, so on 22 August, the FSA announced its intention to shut down the most widely used promotional channels.

The proposal is to be implemented through two main strategies. First, remove key existing exemptions that permit Ucis to be marketed to retail investors. Second, expand the range of financial instruments that are caught by the Ucis marketing restrictions.

So what routes to market are being shut?

The large majority of retail Ucis investors were sold their investments by IFAs who advised them on the suitability of the fund. This is permitted under current rules but the problem is that many IFAs were not assessing suitability properly.

Faced with the prospect of educating the IFA community about its suitability assessment obligations, the FSA has determined that it is better for the lifeguard to close the pool than issue life jackets.

The second limb of the proposal is to extend UCIS promotion restrictions to schemes that are close relatives of the Ucis genus, such as special- purpose vehicles and traded life policy investments. The FSA has collectively christened all such Ucis and similar schemes “non-mainstream pooled investments”.

The core difficulty the FSA’s draftsmen are grappling with is how to distinguish between trading companies and investment funds, as the corporate framework inherently involves pooling of shareholder monies.

The current exemption from the Ucis regime for bodies corporate permits a wide range of corporate funds to achieve a rather arbitrary preferential regulatory treatment for non-incorporated alternative structures.

The FSA’s proposal is to remove SPVs from the retail menu. However, the legal definition it is using risks adding mud to the waters of the channel dividing commercial and investment structures. In particular, the definition lacks specificity about the parameters of concepts such as “securitisation” and ancillary purposes.

That means that the FSA may have difficulty in successfully prosecuting those swimming in that channel and distinguishing them from legitimate retail investments, such as holding companies and personal investment vehicles.

The proposals would produce certain anomalous results, which indicate that the FSA may have done better to wait for the implementation of the Alternative Investment Fund Managers Directive rather than act in haste.

For example, there does not appear to be any public policy reason for distinguishing between the regulation of non-mainstream pooled investments and a Ucis.

However, an SPV would not require an FSA-authorised operator and an SPV investing in property would be promote-able to high-net-worth investors while a Ucis with the same risk profile would be subject to greater regulation in both cases.

The impetus for firms to find technical methods of falling outside the scope of regulation altogether is increased by the FSA’s propensity for issuing statements of intent that only have meaning for those it regulates

The FSA has hinted in the draft rules that it doubts whether it would be fair to promote a non-mainstream pooled investment to a high net worth individual who does not also demonstrate investment sophistication, which rather begs the question of why Parliament created a stand-alone high net worth exemption in the first place.

The proposed requirement to have the compliance officer take personal responsibility for the promotion of each non-mainstream pooled investment promotion also encourages business to go underground.

Ultimately, this measure is a strangely-timed salvo preceding the full barrage of the AIFMD, but all the torpedoes are aligned to sink the boat of any IFA foolhardy enough to keep flying the mast of the traditional unregulated fund in front of non-professional investors.

David Blair is head of financial regulation at Osborne Clarke and Tina Lai is a regulatory lawyer in the financial institutions group at Osborne Clarke

The FSA’s proposals to restrict the sale of Ucis

CP 12/19 sets out the FSA’s plans to restrict the promotion of unregulated collective investment schemes and close substitutes.

The proposals include:

  • Banning the promotion of Ucis and similar vehicles to any retail investor not classified as a sophisticated or high-net-worth investor
  • Investors can be certified by an adviser firm or can opt to self-certify as a sophisticated investor
  • The ban would include Ucis funds or special-purpose vehicles and traded life settlements funds. Some structured products linked to non-mainstream assets would also be included included
  • The FSA proposes removing the exemption that allows current or previous investors in a Ucis to be marketed to
  • Adviser firms will have to record the basis for each recommendation of a Ucis or similar process and each promotion will need to be approved by the firm’s compliance officer
  • The ban on Ucis promotions will have no effect on self-directed investors


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