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Emma Simon: Unregulated investments will continue to trouble the industry

Emma Simon MM blog

Whatever acronyms they now go by, there is no disguising the fact that unregulated investment schemes are a murky business.

Taking a closer look at some of these schemes this week hammers home why so many consumers are distrustful of the financial services industry. It is a toxic mix of fat commissions, over-complicated products and overly optimistic returns that have led a minority of advisers to missell these high-risk plans.

There have been schemes investing in environmentally-friendly farm machinery that did not make any money and ones that invested in UK film companies that did not even make any films. There have been tax rebates that have been clawed back by HM Revenue & Customs and investors who have ended up owing four times what they originally invested. 

And while advisers were not supposed to promote such schemes to retail investors, this has not stopped some flogging them to pensioners and those on state benefits. It is shocking to note the FCA reckons only one out of four of these advised sales is “suitable”.

But what really sticks in my craw is that those who have mis-sold these schemes in the first place are now getting a second bite of the cherry by pursuing mis-selling claims on behalf of investors – for a fee, of course.

One example is Rebus Investment Solutions, a claims management company that specialises in this area. It will not surprise readers to learn that its business development manager was effectively banned by the FSA last year after giving “misleading statements” about unregulated investment schemes.

Of course, there is a reason why people say poachers make the best gamekeepers: they are in a good position to identify and advise those who have been sold these complex schemes. But it rankles that investors who have been shortchanged once are now being asked to pay a further £1,500 for this specialist help, as well as lose a further 20 per cent of any redress won.

Still, despite the regulator’s best efforts to stop advisers promoting these scheme, it seems some will simply try to bypass advisers completely and sell directly to investors.

Just 24 hours after the latest FCA clampdown, I received an invite to learn more about the “exciting” investment opportunities one scheme was offering, which “promised” returns of 20 per cent a year.

As this scheme invests solely in social housing in Brazil, this fact-finding mission included an all-expenses paid trip to the country to see how the property market was booming ahead of next year’s World Cup and forthcoming Olympic Games.

The minimum investment is £23,000 and, as with any other overseas property investment, I assume there will be extensive gearing and currency risk. Not the kind of investment a national newspaper should be promoting. 

It seems the problems created by UCIS or NPMIFs will not be disappearing any time soon.

Emma Simon is deputy personal finance editor at the Telegraph Media Group

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Emma – you need to draw a distinction between unregulated collectives and unregulated investments they are different things and your article, whilst written with a sobering message, swings between the two.

    UCIS require promotional exemptions. Unregulated investments such as the Brazil property one you make reference to, dont and are not therefore caught by the promotional restriction in FSMA – thats why the nationals can promote them.

    All in all however it is still a worm ridden mess and unregulated direct investments (e.g not the collective variety) are the next big misselling scandal in this space i think!

  2. Unfortunately I see plenty of this and it worries the life out of me when I meet individuals who are not authorised nor regulated yet that are promoting investments to the public….

    I’ve been an IFA for many years and I’m very sad to say that it is very rare than anyone asks me whether I am authorised, regulated or qualified… it’s up to me to highlight the importance of this as part of our usual disclosure.

    As I’ve posted elsewhere, whilst the politicians seem to worry about whether regulated pension plans are charging 1% or 1.5%, there are clients having ‘too good to be true’ schemes put under their noses whilst being promised the earth!

  3. Emma a brilliant article and illustrates why the FCA need to take stronger action in this area. The FCA needs to stop allowing loopholes for these organisations to operate in the UK. Harlequin is extremely good example of how unregulated property schemes do get promoted within the UK to unsuspecting pension investors.

    I myself received information from ex-Harlequin agent now selling Hungarian properties with exactly the same message that they are SIPP and SASS compliant and even have Hungarian government backing. What made this even more worrying is that the literature seem to give the impression that some of these schemes were covered by the FSCS, which they obviously are not as they are unregulated investments even if held within a SIPP or SASS. The fact is that these schemes break the basic marketing rules and the FCA need to stop saying that they are exempt because this gives a very confusing message.

    If you ever report any of these schemes to the Advertising Standards Authority they will simply refer you to the FCA, where the FCA will simply say that they are exempt. Surely somebody needs to regulate these companies after all it has been reported that Harlequin could cost investors £300 million.

    My approach to this would be if you are selling a collective investments scheme of any type other than shares in the company then it needs to be regulated and authorised comply with FCA rules. I would have thought that this would have bought most of these schemes into the regulated world if this approach was introduced.

    Once again well done for raising awareness of this important subject.

  4. man on the moon 15th June 2013 at 3:35 pm

    Emma, great article.

    ‘Still, despite the regulator’s best efforts to stop advisers promoting these scheme, it seems some will simply try to bypass advisers completely and sell directly to investors.’

    very true and it is getting worse.

    these schemes are often collaborative wrapped up schemes which are not marketed or advised by Advisers in any way shape or form.

    the nefarious activities of marketing companies colluding with SIPP Trustees to take on these ‘schemes’ by direct consumer investment and with disclaimers re HNW and Sophisticated investors needs investigation.

    Over to you MM

  5. Unfortunately, whilst Emma makes some good points about some toxic investments, the other comments pinned here highlight one of the fundamental flaws in the FCA’s rather blunt war on UCIS.

    We have reached a point where the Regulator is obsessed by ‘form’ and providers and advisers often respond by also looking at ‘form’…rather than substance.

    Whilst there are some unfortunate and eccentric investments constituted as UCIS and some pretty poor practice (e.g. little old ladies being told to invest 100% in Geared Dubai Park Space Rental schemes et cetera), this simply isn’t the whole story about ‘UCIS’. Not very long ago at all, the Regulator understood that it was possible to find sensible investments constituted as unregulated collectives. (“It is possible that some unregulated schemes could offer lower risk investments” – DP 05/03)…

    …Meanwhile, some extraordinary things are not UCIS and can be marketed directly to the public, or by unauthorised advisers knocking on doors.

    Then there’s the small point that some asset classes are might work better as ‘UCIS’ rather something allowable under the new rules. For example, if one wanted to include (say) a 5% allocation to Private Equity as a diversifier, this is perfectly possible under the new rules using an Investment Trust. However, in the event of a crash a la Autumn 2008, this stuff fell further and faster than other quoted equities. A good example of such “man made correlation” is the 3i share price plummeting 82% whilst its book value fell by just 19%.

    5 Years ago, a Provider or Adviser would be concerned with TCF and whether a product was adding value to segments of the market. Now they ask me “Is this a UCIS?”, “Can I advise on this?” and “How do I structure this if I want to use such-and-such a marketing channel?”

    The approach of “Eek its a UCIS!” is simplistic and ultimately to the detriment of consumers.

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