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Technically speaking: Unregulated schemes
12 August 2010
The FSA has been incredibly prolific and industrious recently with their thematic reviews and projects examining areas such as pension switching, structured products and platforms. One of the latest to cause a raft of activity and the production of associated industry and guidance documents focused on another high level risk advice area – Unregulated Collectives (UCIS) The good and poor practice guides are undoubtedly an invaluable source of data, providing clear and useful FSA benchmarks against which firms can assess their own processes. The production of concise and identifiable suitability checklists equally provide valuable further assistance and importantly a framework for firms to ensure that their own procedures are aligned to that of current FSA thinking. But whilst FSA guidance does not establish a set of specific rules to adhere to, it still goes a long way to providing greater clarity of information to enable firms to make a better assessment of their own internal business standards – ensuring they match current regulatory requirements and thinking. As always, the Regulator has provided sound examples of good practice – which for UCIS relate to the percentage exposure advisers select for a fund, style of investment or product, generally ranging between 3% and 5%. The Structured Product thematic paper also focused on “good practice” and identified a clear limit on exposure to any one structured product to around a maximum of 10%. Despite becoming more accustomed to the nature and structure of the review documents, the recent UCIS publication, although still relatively short in length, still manages to cover a wide range and scale of complex issues. The headings used by the FSA are very generic but nonetheless still tell a story: Lack of understanding of the product and structure being sold, i.e. did not know that the fund being recommended was an unregulated fund. Lack of fund research and understanding of the fund investment strategy. Lack of understanding of the regulatory rules and scope of permissions. The difference with the outcome of this review is that in delivering this to the industry the regulator has also forcefully delivered the outcomes of immediate FSA action against firms where reviews have been conducted. The result; six small firms promoting and recommending UCIS to their customers are being investigated by the Enforcement and Financial Crime Division. Other actions taken by the FSA include: Inviting 11 firms to vary their permissions so they cease advising on, arranging, or otherwise promoting, any UCIS scheme or product which involves investment in such unregulated schemes, to any of its customers, until a full review has been completed by a skilled person and any required remedial actions undertaken. Appointment of a skilled person under Section 166 FSMA (Financial Services and Markets Act) to review their UCIS promotions. Potential payment of redress for cases deemed unsuitable. The History Unregulated collectives have been around for many years but the majority of advisers have previously discounted or ignored them, as historically there appeared to be no real demand for these types of investments. However, between 2008/9 - the period that formed part of the FSA review - many clients were losing confidence in traditional investment markets. The change in the global economic situation seemed to have pushed some advisers to seek alternative investment strategies, many of which involved offshore unregulated funds. The glossy brochures looked extremely attractive, headline rates looked appealing and they promised to deliver (in large print) what the traditional investment strategies appeared to be failing to deliver. Offshore unregulated funds are, by their very nature, an extremely higher risk proposition. They can adopt almost any investment strategy they wish and operate in a manner that may not be consistent with UK regulation. They do not deliver the same investor protection although many claim equivalent protection is provided. They tend to invest in the more exotic areas such as forestry and woodland, overseas property ventures and new forms of commodities and even student accommodation. Unfortunately it seems clear now that firms and advisers once tempted by these funds and strategies are likely to pay the price for doing so. Of course the role of an IFA is to challenge and question the information presented on any product or fund but It appears from this report that at least for some of the firms in question, this has not been completed with a sufficiently detailed level of due diligence. To continue to operate successfully in this industry, advisers must be able to demonstrate a wide range of skill sets including regulatory understanding , product, technical and research knowledge. It has always been a requirement that firms have the expertise and skills stated but the FSA have never been so forthcoming until now in publicly stating the required standards and enforcing them. The safest route now, for both clients and advisers alike, is one that involves understanding, knowledge and experience. Having more confidence in current investment theories and moving forward with clients based on a strong understanding of the funds and products available and selected is essential. There is some suggestion that the recent FSA activity means that those operating shortlists and central research functions, run by industry research professionals, may be best placed to meet the FSA expectations and standards. Advisers working with funds and products which have been thoroughly researched against benchmarked and consistent criteria can have much greater confidence about working in a safer environment. The FSA is sending out strong and unequivocal communications about what it expects from the industry and more importantly how it will deal with those that fall below their expectations. Firms must have in place a robust advice process from start to finish and falling short of the required standards will not only be very costly but may even result in the Company’s eventual and premature demise. To be forewarned is to be forearmed but failure to prepare will bring invevitable consequences. Julie Darlington, director of regulation, 2plan Wealth Management Published by IFAOnline
