Given the increasing number of scandals involving unregulated collective investment schemes and the cost to the IFA sector, both in terms of likely compensation and reputational damage, the FSA’s Ucis proposals are to be welcomed.
Last week’s consultation outlined plans to ban the promotion of Ucis and similar products to retail investors unless they are sophisticated, high net worth individuals.
Some have questioned how far this moves us from current rules which prohibit the promotion of Ucis unless certain exemptions are met, including one on suitability.
However, it is this exemption that has been misused by some advisers to promote the schemes to mainstream retail investors who have not understood the risks involved. The regulator proposes removing it.
Since its review of Ucis sales in 2010, which found 90 out of 131 sales were inappropriately promoted, the FSA has taken action against a number of firms.
In last week’s consultation paper the regulator says it has written supervisory letters to 250 Ucis providers and distributors and will take “strong action” where necessary.
A number of high profile recent investment collapses have involved Ucis vehicles where it has been far from clear the investors were aware of the level of risk, and potential lack of compensation if things go wrong.
The high levels of commission sometimes available through such schemes raise concerns about possible bias and are hard to square with the way the majority of the industry is moving on charges.
Despite concerns from some about the squeezing of investor choice, the use of Ucis in the right circumstances to the right investor is not being outlawed. The FSA estimates there are between 1,000 and 3,000 Ucis distributors with this number likely to fall significantly to between 250 and 750 firms.
Advisers recommending Ucis will in future face stricter compliance and reporting rules which should help ensure more draconian measures, such as a complete ban in any circumstances, are not required in future.
Whether the FSA could have acted sooner to prevent some of the Ucis disasters we have seen is open to debate. However, in taking its time, the regulator has put forward a balanced set of proposals which should have a positive impact on consumers, the IFA sector, and the small number of specialists who will continue to offer Ucis.