June 7, 2013 6:36 pm

UK regulator bans promotion of ‘risky’ investments

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Financial advisers will no longer be able to recommend risky, unusual or complex funds to ordinary investors following a ban by the UK’s new financial regulator.

From January 1 2014, promotion of unregulated collective investment schemes such as traded life policy settlements, overseas property and fine wine, will be limited to sophisticated or wealthy clients, defined as those with an income above £100,000 a year, or more than £250,000 to invest.

The changes will make it harder for retail investors to find information and access the products, although they will still be able to invest money directly.

Unregulated collective investments schemes, known as Ucis funds, can be sold legally in the UK but are not authorised or regulated here, so are not subject to the same investment and borrowing rules as domestic investments and can put money into a range of exotic assets.

The Financial Conduct Authority has introduced the restriction in the wake of a series of high-profile scheme failures, which have left retail investors facing millions of pounds in losses.

Although there are already restrictions on whom these products can be marketed to, research by the regulator found that thousands of retail investors have put about £4bn into unregulated schemes and that many may be unaware of the risks.

The FCA found evidence of an 88-year-old who had been advised to switch 70 per cent of her investments from mainstream investment bonds into two Ucis funds, which provided returns based on the performance of non-mainstream assets.

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Underlying investments held in these sorts of funds, ranging from Brazilian teak farms and bamboo forests to classic cars, can be hard to value and difficult to sell, which raises the prospect of investor losses. Offshore schemes are not covered by the UK’s Financial Services Compensation Scheme, which provides some redress if a product provider gets into financial difficulty.

Some investment managers say that the FCA is stifling innovation and argue that the ban on advisers accepting commission should be enough to prevent biased or inappropriate sales.

The regulator believes that the ban on marketing to all but the wealthiest and most experienced investors is a balanced approach and points out that retail investors will still be able to access a range of tax-incentivised collective investments including venture capital trusts, enterprise investment schemes (EIS) and real estate investment trusts.

Originally, the regulator had implied that these would be caught within the ban, but this was clarified following lobbying from the industry, which argued that curbing funds would be detrimental to small business. The EIS Association says that it expects sales of EIS funds to increase now the confusion has been removed.

The marketing ban on risky investments is all part of the financial regulator’s tougher approach to protecting consumers and stepping in at an earlier stage.

The FCA is taking action against companies and advisers who sold Ucis to investors who did not have the appropriate risk profile to warrant the sale. Investors who are concerned that they have been sold an unregulated investment should speak to their adviser or check the marketing of the product they bought, said Rebecca Prestage at The Consulting Consortium. If the risks were not explicitly spelt out, then they should make a complaint to the firm involved.


£6m fine for Sesame

This week the Financial Conduct Authority continued its mission of cracking down on retail finance abuse with a £6m fine for IFA network Sesame.

Sesame, which has about 10 per cent of the entire financial adviser market, failed to make sure that advice given to customers was suitable over a number of years, according to the regulator.

Part of the penalty related to sales of Keydata life settlement products, also known as death bonds, between mid-2005 and 2009, during which many investors were mistakenly told that these investments were low risk.

The majority of the fine was for wider failures in the way the company managed advisers between July 2010 and September 2012. During this time the FCA found that Sesame failed to monitor properly how suitable investment product sales by advisers were.

This isn’t the first time that the regulator has come down on Sesame. It has incurred two other fines relating to the sale of investments in the last ten years, although both were far smaller.

Sesame says that it has improved its systems and is now reviewing old Keydata and pension transfer business to check whether any customers were given unsuitable advice.

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