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Phil Billingham: Ucis rules are important step forward

Lets start with a simple premise. People are allowed to take risks with their Investments. It is a free market.

But – and there is always a ‘but’ – they must be allowed to take known risks, where they have, and can be reasonably expected to, give informed consent to those risks.

And, for me, that captures everything that has been wrong about the UCIS market so far. The risks have rarely been understood by the adviser, let alone the Investor.

And so the FSA’s proposals contained in CP12–19 are to be broadly welcomed. This looks like a case of the Regulator actually listening to concerns, and attempting to address them, protecting both consumers and the adviser community whilst maintaining a free market – a very hard line to walk, so we must give credit where it is due.

Some of the comment around CP12-19 have already said that the exemptions that are proposed – essentially sophisticated and high net worth investors only – do not change anything. Well, sort of. Most UCIS sold – and sold they have been – have relied on the ‘suitability’ exemption, and this has been used to ‘sell’ these products to mainstream retail investors. And we have seen how well that has turned out.

The FSA’s proposals fall into two parts. Firstly, by tightening up the exemptions, one could argue that the FSA is simply taking the rules to where they should have been in the first place, in that these are specialist investments, and they should only be available to a narrow range of more experienced and capable Investors who are able to take an informed ‘Punt’ on an esoteric product, and can afford the losses that seem to occur as a result. Perhaps the FSA was guilty of being too flexible in the first place, and overly optimistic that IFAs would understand the importance of the ‘suitability’ exemption?

The second part is that they are seeking much closer control by the Compliance function, in that each case must effectively be signed off. This should focus the mind internally, and in many cases, add a useful internal ‘peer review’ or ‘four eyes’ check to the process. Again, this proposal has merit. Many IFAs are small companies, with long established client relationships, and no appetite to cause any harm to their clients at all. By strengthening the internal checks and balances, it is clear the FSA is hoping that this will result in more thought through advice to the appropriate clients WITHOUT resorting to a non-commercial and probably unenforceable ban on product innovation.

What I do hope is that this paper will have three further outcomes:

  • I hope we have seen the very last of the ‘You must sell Ucis / Scarps / whatever to remain independent’ This is clearly nonsense, and always has been.
  • Following on from this, I hope more firms will design and publish clear investment philosophies that put the focus on adding value through the advice process, rather than simply by fund / product selection.
  • I would like to see the market split into ‘simple’ funds – liquid, long only, market and home country taxation risk only, behaviour dictated by asset allocation and diversification – and ‘complex’ products, where there is an additional risk factor, such as derivatives, gearing, jurisdiction etc.

This would deal with the correctly expressed view that some Ucis are lower risk and simpler than some regulated funds, and focus the conversation on the structure of the fund, rather than simply what it is called?

So, a useful step forward. Let’s hope it works.

Phil Billingham ACII CFP Chartered Financial Planner and director of Phil Billingham Partnership


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. As ever, sensible comments from Phil. We should applaud the FSA for seeing sense on this.

  2. There’s a lot of sense in this article Phil.

    The concept of labelling funds is also sound – are you familiar with the way Guernsey (of all places) has different categories of authorised and ‘registered’ funds??

    But for some of us, the issue is that FSA has been trying to enforce these ‘rules’ without actually consulting or making such rules. Advisers have thought they were acting within the Rules – but have been clobbered, irrespective of whether they’ve done well by their clients or not.

    This CP was the FSA’s first admission (though hidden a bit in the paper) that the existing rules included this ‘suitability exemption’. In fact, its always been there – long before anything about HNW and Sophisticated Individuals. Yet the FSA has been publicly avoiding any mention or discussion over the meaning of this exemption, and claiming that the HNI and Sophisticated exemptions were the only ones existing…

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