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Nic Cicutti: Three steps to compliant unregulated investment advice

Such products should not be off limits for all but record keeping is key

One of the things I have learned to expect whenever I write something vaguely contentious in the pages of Money Marketing is the arrival of at least one “Well, what would you do?” email in my inbox.

In the hands of a particular interlocutor who makes contact with me several times a year, our communications mostly tend to be brief and friendly. Occasionally, we end up exchanging up to a dozen emails, each slightly more fractious than the preceding one.

I recall one discussion about 13 years ago, in which my refusal to accept that IFAs were in the same professional league as accountants and solicitors – and potentially health clinicians too, as long as the thorny issue of qualifications could be resolved satisfactorily – riled my debating partner so much he did not make contact fo r six months.

A couple of weeks ago, a subject I received several emails about was that of unregulated investments. Should they be excluded from Financial Services Compensation Scheme coverage? No, was my contention. They are being recommended on a regular basis by advisers to people who are not sophisticated investors, in which case they clearly need to come under the compensation scheme’s remit.

For my friend, this was too much and a “Well, what would you do?” email duly arrived. He gave the example of one client who had come to him with a particular set of needs, which he had addressed through the use of an unregulated investment as part of a complex re-ordering of her portfolio. Apart from challenging me on the specifics of his recommendations, this adviser asked: “Are you suggesting we should never recommend a Ucis to someone who is not a sophisticated investor?”

My response followed a number of lines. The first was that I had no intention of second-guessing my friend’s advice choices. He knows his client and her needs far better than I do. If he is confident the advice he gives meets those needs, he does not need validation in that regard from me. My second line of defence, which referenced our discussions about professionals years ago, was that medical history has often shown how medications originally created for one particular illness can be used to treat another.

One of the classic examples is Amitriptyline. If you have ever suffered from long-standing nerve-related pain there is a good chance you will have been prescribed this drug. Yet it was originally developed and is still used to treat major depressive disorder and anxiety disorders, as well as attention deficit hyperactivity disorder. It was only many years later that researchers found it was also incredibly effective for chronic (long-term) pain caused by arthritis, spinal problems, fibromyalgia, chronic headaches and peripheral neuropathy.

In other words, it is entirely consistent with good financial advice to consider sophisticated products for clients whose overall profile would not normally justify their use – as long as you have given appropriate consideration to all the issues involved.

Which takes me to my third point. Years ago, I was having a discussion with a good friend who is a serious incident investigator in the NHS. Serious incidents include cases where death or serious injury to a patient has resulted from mistaken decisions or omissions on the part of health professionals.

One of the first things he learned in his role was that record-keeping (or the absence of it) is the crucial problem in almost all the decisions made by clinicians. When looking at a case, he operates by a simple set of questions: is there a record of that episode of care, or of the symptoms manifested by a patient? How clear and detailed is that record? Does the record discuss the specific treatment being prescribed and/or administered by the health professional, as well as the outcomes of that treatment?

Does it make reference to reviews being carried out at regular intervals to determine the next phase of treatment? If some or all of these questions are in the negative, this constitutes a care and service delivery problem regardless of whether, on balance of evidence, the original treatment decision was potentially correctly made.

Exactly the same strictures apply to unregulated investments – or any investment for that matter. If you can show appropriate consideration was given to the many variables that may affect an individual client’s needs and how your recommendation matched his or her risk profile, you are a long way there.

If you can evidence that a detailed discussion was held with a client about a product and they understood what it is meant to achieve and its relationship to the rest of their portfolio as well as those risks, that is the second part of the battle won. The third element is that of being able to demonstrate in the client’s notes a regular review of that portfolio and what consideration you have given to any changes to all underlying investments in the light of any changes in their performance.

Evidence that and you should be safe from regulatory scrutiny, in my book. I am not sure I fully persuaded my friend that I am right on this one. Either way, I look forward to many more “Well, what would you do?” contacts from him and others who may wish to email me.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Not sure this works as an example all of the time-If a drug had many applications yet killed a lot of people it probably wouldn’t get used that much. Many UCIS seem to result in catastrophic losses. It would take a lot of persuading to convince someone to take a drug that may result in catastrophe. Unless it was a hard drug in which case there could be some, ahem, self prescribing, and it would be a banned substance. Might have missed your point.

  2. Should not the title of this piece be Three Steps to Regulated Advice on Unregulated Investments? For regulated advisers, there’s no such thing as unregulated advice. And, for unregulated advisers, there’s no such thing as regulated advice (not legally anyway).

    That aside, are ANY investment products actually regulated? ISA’s, Investment Bonds and PP’s for example aren’t regulated, only the providers of such investments. So is the term UCIS either appropriate or accurate? What we commonly refer to as UCIS are, in fact, just investment products manufactured and marketed by unregulated providers.

    Therefore, any calls for the FCA to regulate UCIS are, in reality, calls for the FCA to regulate all providers of all investment products.

  3. I don’t think that it is the odd adviser who recommends one to a HNW client that is the real problem (not that I agree); it is the firms who sell them by the bucketload and then go bust when it all turns bad, that leave us with an industry bill via the FSCS and a worsened reputation.

    If it removes choice from a few well intended firms by banning the recommendation/sale of unregulated products then I think we should absolutely take that path. Any Tom, Dick or Margaret can sell unregulated stuff, so why use FCA regulatory approval within a firm as a cover by which to do it (I know he answer to that by the way!).

  4. Nic, I can see no justification to sell un regulated Product to anyone who is not as you say, a sophisticated investor, keep it simple keep it regulated and after thirty one years of giving advice, still no complaints, and I will say it again I do not agree with you,,, Regulated Products get Regulated Protection , Those selling Unregulated Products should them selves compensate the clients from Personal assets, Not the FSCS Then we would see at lot less of the uneducated investor’s been sold such investments.

    • So to whom will investors turn if a regulated adviser who sold them a duff investment that’s lost them money either won’t or can’t pay suitable/adequate restitution?

      And, as I’ve written above, there are no such things as regulated products, only regulated providers.

      Though many of them may be, not ALL investment products manufactured and marketed by unregulated providers are unsound, wildly risky and therefore automatically unsuitable for all but the wealthiest and most experienced investors for whom losing £100,000 would be little more than a flea bite.

      I support proposals not for the sales of such products on the part of regulated advisers to be banned across the board, but for them to be subject to specific regulatory standards such as:-

      1. specific qualifications,

      2. special permissions,

      3. relevant PII (which alone would probably kick 90% of those selling them out of the market) and

      4. more intensive regulatory monitoring (via the FCA’s lamentably naff GABRIEL system).

      How can it be so difficult for the regulator to see what’s required and then just GTF on and do it?

      • @ Julian

        Of course there are regulated products. What’s the COLL sourcebook for? Do you remember all those property funds that gated around the time of the Brexit vote?

        • Okay, but what does product regulation actually mean in practice? And what’s the point if it applies only to a relative handful of the many hundreds of products out there?

  5. That’s the exact point,,, Regulate the Products, finally we are getting the point, To many advisers Sell what they hardly know about let alone be able to justify why they could not keep it simple

    • But what exactly do you mean by product regulation? It certainly wouldn’t mean regulatory approval because as soon as an approved product failed, all fingers would be pointing towards the regulator, with the voices behind those fingers saying “But you approved it…)

  6. I quite agree that the most effective treatment for unregulated product selling is stop selling unregulated products. If the clients are that sophisticated they can discover them for themselves and purchase them direct.

  7. I don’t get any of this. COBS 4.12 forbids promotion of non-mainstream investments to retail clients. End of story.

    There are exemptions and they are abused routinely. Even if they aren’t, FOS often recategorise investors.

    So in all probability, what you are proposing and discussing here, Nic is in breach of the current rules.

    So the analogy is a bit of a mess since UCIS is only available to a rarified group of investors, but careless medical practice is available to all.

  8. Unless you have a client who was unfortunate to be sold (they are sold and not advised) an unregulated investment then the simplest thing surely has to be to avoid them like the plague.

    A mince pie to anyone can convince me how it is genuinely in the interests of a client to invest in to an unregulated investment product.

  9. Not all investment products manufactured and marketed by providers not authorised by the FCA are, simply because of that fact, toxic. A small (I don’t know how small) number of authorised intermediary firms who specialise in such products, who know what they’re doing and who have suitably robust DD processes use them in appropriately small proportions as portfolio diversifiers and the decent ones have a very low failure rate.

    The problems lie with firms which don’t meet the above criteria and, worst of all, who don’t have relevant PII cover, on which the FCA should but apparently doesn’t insist. Why it doesn’t is quite beyond me. Were it to do so (and, of course, enforce such an edict), the volume of unsuitable sales of such products would (in theory at least) slow to a trickle almost overnight. If ever there was an example of an area on which targeted and proportionate regulation (that phrase yet again) is required, this must surely be it. It’s the liabilities of the small number of incompetent and commission-hungry cowboy firms without relevant PII cover that routinely fall on the rest of us by way of the FSCS.

    As has been pointed out many times, every field of endeavour (solicitors, accountants, builders, you name it, even the police) has its share of rogues and it’s the responsibility of the FCA to identify and root out those in ours. Why is it still failing to do so?

  10. My first query is why does a non sophisticated investor need an UCIS.

    This seems to be a gamble for both investor and adviser.

    Secondly, how did the investor acquire a portfolio which needs greater diversification without becoming a sophisticated investor.

    • The answer to your first question is that they almost certainly don’t.

      The answer to your second question is (probably) with advice. Just because someone holds a large, mature and well diversified portfolio doesn’t necessarily make them a sophisticated investor.

  11. The problem is UCIS generally fall between downright fraud and pure speculation. They often pay high commission and are promoted by shady outfits.

    A combination of greed and ignorance lets the innocent or stupid fall into the trap and incompetent or rogue advisers put out the bait.

    A sophisticated or high net worth individual may be prepared to speculate but does anyone really want to see their hard earned cash taken away by UCIS where the directors are living the high life off the back of Ponzi schemes and the like.

    Often the adviser is also conflicted and involved in the deception in some way.

    Even ones that have seemed to prosper for a while (like student lets) eventually crash and burn.

    Maybe if you have done detailed research and know the people involved or a regulated firm has an unregulated fund that may offer genuine opportunities (they also usually go bust in the end). Perhaps it’s a community type investment where you don’t expect to make a return for a long time.

    There may be the odd example but mostly they are not worth the candle unless you are on the take or happy to accept the consequences when it all turns sour.

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