7th May 2013
It should have been April. Now it will probably be June. But despite the two month timetable slippage reported here on trade website Money Marketing, the new regulator Financial Conduct Authority is set to announce its first ban sometime next month. Financial journalist Tony Levene gives his own strongly-worded analysis below.
That will bring the long-heralded clampdown on UCIS. These are the unregulated collective investment schemes that increasingly feature in both the investment and, especially, the pension planning of the bold as well as the list of shame of the bust.
But anyone who expects investors to be one hundred per cent protected from some of the riskiest investments on offer, might just as well wish for the moon. For the new rules will not prevent gullible investors from buying – it will only stop recognised financial advisers from “promoting” (regulator speak for selling) these vehicles. And any formal ban will take at least a year to put into place, allowing some advisers to make a last chance push onto clients.
Collective investment schemes pool the money of many investors to give them the clout of a huge player. They have been around for a century and a half in the guise of investment trusts, unit trusts, life insurance policies, money funds and property funds. They have been the mainstay of most people’s pensions and other savings – only a small minority have opted for individual stock holdings.
The vast majority of these plans are regulated by the watchdog – now the FCA whose rulebook controls investment powers, and how they are run, although not returns or charges. And if specific criteria are met, overseas funds are also recognised within the UK.
A significant minority of funds do not fit that regulation. These are UCIS. UCIS use has dramatically increased over the past few years as previous rules on what could be included in a Self Invested Personal Pension (SIPP) were lifted to offer what many would say is effectively a free-for-all. Schemes once considered beyond the rules could be sold to investors as “SIPP compliant”.
Often complex, these schemes go beyond shares, bonds, commercial property and cash to more exotic areas such as foreign forest plantations, film production plans (often sold more for tax purposes than their chances of artistic success though some have fallen foul of the Revenue), wine, overseas property and bio-fuel schemes on the promise of higher returns or diversification.
But while promoters stressed gains, they generally spent less effort on discussing the risks. Many investments are illiquid – some may take a year or more to return money when holders wish to cash out. And a significant number have seen client cash evaporate.
There should be a balance between the freedom to promote and the need to protect vulnerable consumers. With UCIS, the current position is that they are not to be promoted – a definition that includes marketing literature, emails, websites, phone calls, social media – by advisers to the general public except to certain exemptions.
Certified high net worth individuals, and self-certified sophisticated investors.
The definitions are difficult to find but easy to fulfil once discovered.|One self-certified sophisticated investor compliance form states someone who has made more than one investment in an unlisted company in two years or is, or has recently been, the director of a company with an annual turnover of at least £1m qualifies.
Buying a few shares in a couple of football clubs would count for the first while owning corner shops would meet the second requirement – even if that ownership proved to be disastrous.
So unscrupulous advisers help potential clients with this requirement – and then promote offshore schemes of unlimited complexity (and ultra high commission). Another rule – is that once someone has bought into a UCIS, they are then considered to be sophisticated enough to buy into others. This could mean that someone in a property scheme could then be sold a film production plan, even if most property experts know little about cinema financing.
There’s another wonderful piece of circularity. Investors have to sign an agreement that they understand they will lose certain rights including coverage by the Financial Services Compensation Scheme. But they also have to agree that “I am aware that it is open to me to seek advice from someone who specialises in advising on this kind of investment.” This could lead them to taking advice from the very adviser who is promoting the scheme.
The new rules will simply ban the promotion of all UCIS but not Venture Capital Trusts and Real Estate Investment Trusts.
UCIS promoters will have at least a year to assimilate the ban – for some reason the regulators buy into the “difficult to change our business model” line. But – here is a debate on how far you can protect people from themselves – the prohibition does not include overseas advisers targeting UK investors.
Unless the final document has a surprise, it will accept no one can effectively protect investors from all UCIS promotion. The best way to do this would be changing the SIPP investment rules. For as long as the tax regulations allow almost anything, then it will still be a case of anything goes.
Current SIPP and UCIS investors can expect a deluge of offers. Meanwhile, one SIPP provider has warned: “In five years, we have never seen a single one produce the returns promised in the fund’s literature. They never deliver what they promise, and are bordering on dangerous. We have investors with overseas property UCIS in their SIPPs going back five years which should have matured two years ago, but none of them have. Don’t take claims from UCIS promoters as gospel.”
You have been warned though not by many UCIS providers of course.