Building on a thematic review from 2010, the FSA is to issue a consultation paper within the next couple of months which will outline its proposal to ban all marketing and selling of unregulated collective investment schemes (Ucis) and what it considers “non-mainstream” funds. Alongside TLPIs, this includes funds investing in timber, fine wines, and overseas real estate – a variety of alternative asset classes with very different risk profiles.
To recap, the FSA’s original guidance notes released in November branded TLPIs as “high risk, toxic products that are generally unsuitable for the majority of UK retail investors”. A number of wealth managers disagreed – at least one publically called on the regulator to clarify the ‘high risk’ and ‘toxic’ tags on an asset class that typically sits in portfolios as a safe diversifier – and consequently the FSA’s final guidance does take a softer tone.
A breach of rules
Drawing on its 2010 review, the FSA says it found that around three quarters of Ucis funds were in breach of existing rules, which state that they should only be sold to sophisticated or high net worth retail investors, and financial advisers needs to prove that the investment is suitable for their client.
2012 has seen more willingness from providers to work with the FSA rather than against it. One of the leading players, EEA, is in the process of restructuring its Life Settlements Fund to better suit investors and it clarified this week that the fund should only be sold to particular retail clients provided that the adviser is able to provide “detailed and robust” justifications for their suitability assessment.
Don’t panic!
However, let’s not forget that EEA was forced to suspend dealings in the fund in December as investors rushed for the exit. Does that make the fund any safer in the FSA’s eyes? How can the regulator be sure that we will not see panicked outflows from other Ucis funds once its intentions are made clear?
Just as advisers must be sure to communicate the risks of investing in these products to their clients – no matter how wealthy or sophisticated they may be – the FSA too has a responsibility to manage its communiqué effectively.
Do you invest in Ucis funds? If so, will you be selling out? Let us know.
