FSA probes six firms over unregulated product promotion

I have seen some of these schemes promoted to IFAs in a very worrying way. The unsuspecting are invited to 'investment seminars' where outrageous claims are made. I looked into one such scheme at the behest of a client, and saw many risks to the 'investment.' I warned her not to go near it, but...

I am glad the FSA is investigating this further since these types of scheme give the regulated advice industry a bad name. I can only see these schemes being of interest to extremely sophisticated and risky investors; however, I suspect that most investors are neither.

Why are the products unregulated then???

I can think of only a very few good reasons why an IFA would advise an unregulated product. The fact it is unregulated should immediately ring alarm bells as to quality and governance, not to mention that most PII policies will not cover them. We always leave well alone!

I must be completely out of the loop. Without needing to consult our new business register I can state unreservedly that this firm has never advised any client to invest in an unregulated collective.

This will undoubtedly be viewed as hilarious by New Model Advisers with their shiny new exam results and RDR ready business strategies. Provincial hick they will say, with no sense of adventure. He probably doesn't even do ETFs, CFDs, Hedge Funds, ITs etc. His clients must be bored in long only UTs and OEICs with reputable providers and solid fund managers. What a dinosaur.

This all points to havng the product "regulated" and not simply the advice.

If unregulated products are being sold by advisers who are not qualified and regulated to do so is this not another failure by the FSA?

When oh when will all those that claim to know better (FSA, Treasury etc.) realise that they cannot regulate the advice process except at phenominal cost and with huge numbers of staff and really start to address the reality of their flawed system?

It does not work and for the FSA to come out time and time again saying the advice is poor or this or that product has failed must indicate that their system has also failed as after a decade or so nothing has changed.

It really is beginning to look like they don't want to make the system better simply because it keeps them in their well paid jobs.

Simon Kershaw - you are not alone in your club :-)

So who knows who is doing this one then?

Perhaps NOT the normal IFA but one tied to the big institutions?

Any answers?

See this link for what these are: http://www.panaceaifa.com/main/st3337.htm

This came out last November.

Simon, I have all these shiny new exams and a new model adviser but do not advise and never have done for this type of animal

Like other bloggers, I can't see how or why I would ever consider any product that wasn't regulated and managed or arranged by a substantial business which I was able to vet.

More fundamentally, as others have queried, how and why is it possible to legally promote an unregulated investment in the UK in 2010?

Surely this is only possible as a result of FSA failure?

SImon Kershaw and Paul Barnard any room in that phone box for me?

I'm sure not all New Model Advisors regard cunning new schemes as being something that seperates their advice from those of more sedentary advisors!

However the worry for me is that their is obviously a group of advisors out there that consider that they are so Intelligent and knowledgeable that they can recommend what they like and the results will always be good!

The rule for me is that just because I'd invest my own money in it doesnt mean to say I should invest my clients, indeed most of my clients fall into low to medium risk whereas I would consider myself much higher on the risk scale.

Given that the new definition of Retail Investment Product includes, amongst other things, unregulated collectives, if we decide not to sell them because of the various problems highlighted above, will we be forced into being defined as restricted advisers?? Or perhaps we might agree that something unregulated wouldn't ever meet a client's needs and thus ignore it ...

Now ...must go and sort out the dog - he hasn't had his breakfast yet ...

To Simon Kershaw and Paul Barnard - Can I join the Provincial Hicks Club! I know for sure that I qualify from both a location and advice point of view. The biggest pain is never being involved in the endless failures of such companies but having to pay for the clear up costs.

Why is it immediately assumed that a regulated product is safer than an unregulated product?

Have we not witnessed how useful (or perhaps useless) the regulator is with it's hindsight driven processes?

Confusing or what? generic financial advice is unregulated I believe - there are a number of financial planners out there who are not regulated.

So here we have an unregulated product where the advice is regulated...

Like Simon I must be a dinosaur, however is it not time to remove this unregulated sector. I have quite enough to do with the regulated products.

If this was a pharmacutical company providing a medicine/drug that is not suitable for a doctor to prescribe in this country it would not be allowed to be marketed in this country.

So why after such along period of a single regualtory body do we still not have product and the product providers being regulated properly.

I for one have resisted the structured product markets too, being vocal on many occasions as different product providers promotors have visited the office or put on seminars locally. We too had a huge bill to pay out for a company failure, due to the failure of the regulator who allowed the "Product" to be sold, even when there were questions about it.

All I ask is that when I help my clients find solutions to their needs, that the regulator has made sure that ALL the products available in the UK market have been regulated, and I am not putting the client at risk because no-one yet has checked if the product assets, tax structure or risk warnings meet with HMRC, FSA, FSCS etc..

In the last 20 years advice has moved from Direct sales to Tied/IFAs using Insurance Companies, to Skandia type arrangements and now to IFAs using Wrap platforms and a much wider choice of funds.

Its these funds that now can accessed by clients directly or through various wraps and its the funds managers (tongue in cheek) that are making silly claims about returns, risk etc etc.

With these new markets opening up and the distribution of these types of funds being able to go from provider to end user via a wrap without going through an insurance type provider (who would often have filtered these out using their own processes) then there was bound to be some less scrupulous sales type organisations looking to make a quick buck having spotted a loophole.

The FSA quite rightly is flagging the issue up and having looked at distributor funds have seen other non regulated type funds as well (not difficult just look at the spam mail and seminars popping up) and I have to say seem to be doing a better job than normal in heading off these things before they spiral out of control.

Agreed that you cannot stop these schemes setting up (to costly) but you can target these firms, investigate what they are doing regarding making clients aware of risks, charges etc and then come down heavily in the event they fall foul and dare i say it perhaps fine them or if the regulator has no power liaise with one such as the OFT etc that might be able to do something.

Its refreshing to see the FSA fining firms and my hope... is that these funds are used to a) make the regulators more effective in the UK to show that our financial services regulation and industry is one of the best in the world and b) use the funds to reduce the fees that those firms that are doing a good job for the clients pay less by way of fees....

We wait and see but I am more hopeful than i was last year as progress seems to be happening.

Andrew,

Sedentary?

I wish!

... six of one, half-a-dozen of another ... peut-etre??

How many 'Provincial Hicks' have mis-advised Investment Bonds, because they pay bigger commissions than ISAs/Collectives??

How many PH's sold WP Bonds, which were probably clearly unsuitable in the 80s/90s??

How many 'advisers' encouraged transfers to PPs, etc out of occupational schemes??

Regardless of whether product is regulated or not, you're gonna get the bandits/clowns who take the p*** out of the system - and WILL misadvise simply to earn a quick buck. Sadly that's not going to change.

I've advised on unregulated products in past (with a 'clean bill of health' from FSA) and provided you adhere to the FSA's system, it MAY BE appropriate for some (sophisticated, HNW) investors ... but obv NOT ALL!!

So, please don't label unregulated products as the 'black death' ...

My understanding is that you can only recommend these products to experienced or professional investors and not just any old member of the public. At our IFA group we frequently have speakers who are promoting unregulated investments, mainly property based, but when you read the small print in their prospectuses you really wouldn't want to touch them. They remove any responsibility for anything from the promoters and put it all on you as the IFA.

The issue surely is to understand what you can and cannot do - don't rely upon what the investment promoter says, they are not exactly upfront about the experienced investor only requirement.

But please cut the crap about new model or country hick - it's not relevant to this issue - and I do know so called 'old style' IFAs who have recommended these as well as presumably 'new model' advisers.

I have seen worrying cases where IFA's have been promoting unregulated products to clients thinking that FSA rules didnt apply. When I pointed out that they are giving advice that is regulated they were rather taken aback. Let this be a warning to everyone - advice is always regulated.

This article concerns me very greatly indeed as I am currently representing 4 separate IFA firms in various parts of the UK in FSA investigations into their promotion of UCIS.

I have to assume that that my 4 IFA clients are amongst the firms referred to in this article.

If that is the case then it is hard not to conclude that the FSA has not already made up its mind about the outcome of each of these investigations – including my 4 IFA clients nothwithstanding that in two cases the investigation process is still with FSA Supervision and I am only at the stage of responding to the Supervision Team’s report!

This rather calls into question the manner in which they investigate and their impartiality.

As part of the thematic review the FSA required every IFA to answer an online questionnaire about its promotion of UCIS. There are, I believe, 17,000 FSA authorised firms in the UK, the majority being directly authorised IFAs and ARs. The FSA thematic review has looked at 185 of these firms – that is, 1.08%. According to this article n 74 per cent of cases, the regulator found evidence of unsuitable promotions to customers - that means in 74% of the 1.08% , i.e. in 134 firms. One wonders at how accurate an overall picture a sample size like that will produce.

Generally speaking you are prohibited by Section 238 of FSMA 2000 from “promoting”, ie selling or advising on sale, UCIS unless one of several exemptions apply. They are too long and detailed to go into here.

In one case I am handling the FSA have required a Skilled Persons Report – hugely expensive – and they are seeking to restrict it to consideration of only one specific UCIS exemption available to my clients when they know full well that my clients used a different exemption in each case. One has to ask whether that is because the FSA officer doesn’t understand the rules, or is seeking to ensure that the Report has a negative impact.

FSA Supervision Visits will be informal and on first name terms. They will not take any notes and it’s a friendly discussion. Please do not be lulled into a false sense of security!

I was in attendance at a Supervision Visit to an IFA a couple of months back. I took almost verbatim hand written notes of 7 hours of meeting – unlike the FSA compelled interview they do not tape these meeting s and produce transcripts (but don’t let that fool you) – in which I have noted the FSA officers as making all sorts of complimentary comments and indicating approval of the UCIS promotion by my IFA client. We then got their report – I had to wonder if I had been at the same meeting!

If you have been promoting UCIS to your clients then you are at risk of a visit from Supervision. If you get a notice of such a Visit you need immediate advice – and please, not from your compliance adviser! I have one IFA client in investigation precisely because of the bad advice for their compliance adviser! Comliance advisers advise on complaince. The don't defend, I do.

Would you let yourself be interviewed by the police about a serious criminal matter, even if you didn’t do it, without a alwyer present?

Phone me 01560 322191 or email me alasdair@sampson-law.com

"Advice to customers is a regulated activity.'

Regulated or not this should be the defining principle. If you don't have the full complement of qualifications accross all areas - you don't practice - whether it be Pensions, Life Insurance, Mortgages, Tax planning, regulated or unregulated investments.

The Govt / Regulator presumably"approves" of Pensions, Life Insurance Policies, Collective funds like Unit Trusts, OEICS, Investment Trusts etc of various hues, also of VCTs and even EIS. This is really just a box ticking exercise giving them and the adviser a flimsy comfort.

The customer seeking advice can only be fully "protected" if the Adviser is properly trained to a very high level in tax planning and investment and properly remunerated by fees not commission. Once this is achieved then the rest must remain under "caveat emptor".

I'd like a fiver for all the "good advice" given to go into long only regulated funds that have gone pear shaped over the last 10 years. Blue chips, Property, Bonds, Gilts - are not exempt and I think I feel sorry for clients in the long only funds who are no better off than they were 5 or 10 years ago when the were "advised" by these paragons of virtue that these were the "safe" place to put their money in.

I'd like another fiver for all the people who - having been brought up in an inflationarry era believed that the "greatest risk to capital" was leaving it in the bank/ building society as it wouldn't keep up with inflation. Ask those who did leave it there if they regret it now? Times change the problem for the next 10 years may well be capital protection in a deflationart environment. Are these advisers still going to promote the lottery of long only funds in equities, property ,gilts, bonds etc. Boring is not always good.

Why do advisers need to seek protection from the Govt for their poor or good advice with lists of funds you can or can't invest in. If nanny says it's OK - is that the basis for the adviser saying it is OK - of course not - everyone should do due diligence and on that basis I agree exactly with Gerry Cooper.

There are many people who can and would like to "so arrange their affairs as to enable the state to take the least portion of their investments" (sic Lord Clyde) . Shouldn't a well trained adviser not be able to look at the full range of funds and tax planning vehicles available in the UK or Offshore, regulated or not and be confident that their advice is driven by their own knowledge and capabilities - and not simply a ring fence round a limited number of things they think they understand. I would not want to be advised by someone who doesn't know and understand the wider picture and is restricted by laws to a so called "safe" selection. I want someone to help - not tick boxes that protect them.

Also it's time the adviser market tried to grasp the difference between investment advice and tax planning and then move on to understand that they can both be safely combined accross a huge range of disparate investments.

High quality qualifications and fee charging is the way forward - not restrictive practice

All else is tinkering

Nobody has thought fit to mention that these products pay eye watering amounts of commission. That they are more often than not promoted by chinless wonders in shiny suits from less than mainstream managers should serve as a warning.

Speaking of which and regarding this time a regulated product and manager. Has anyone ever tried getting in touch with Miton? If ever one got the impression of a back street operation this is it.

Difficulty in getting through on the phone. (It often seems to cut off). The fact that when it is answered you have to ASK if it is Miton. That messages for call back remain ignored. That they are in Reading is not of itself a sin, but……

I get very nervous about this sort of thing. Their Strategic Portfolio looks a reasonable fund. It has good ratings, seems carefully managed, seems to have the right constituents for its class and the mission statement looks good – preserve capital first. But…… all the other boxes need ticking. The fact that yet again this is a Capita administered fund doesn’t fill one with confidence. We’ve seen too many failures from them.

I have clients invested with Miton. I’m sure I’m not alone in being very jumpy about fund managers and due diligence. We’ve had far too much blow up in our faces – although fortunately I seem to have avoided most of the strife. We need to have all the boxes ticked and to be able to have full confidence without any of the small (and larger) niggles that may crop up. If the boutiques want the business they must get their act polished.

Qualifications and fee charging are not the answer at all. I have seen many schemes sold by accountancy firms which didn't ever stand a chance of working - but they were SOLD to create fee income.

How this differs from commission I don't really know, but either way the motivating factor is greed. A well informed greedy person can do as much damage as in ill informed one.

Many Unregulated Collective Investments are unregulated by the FSA simply because theyare outside the UK, and therefore outside the remit of the UK regulator. I worry that the assumption is that you cannot Advise on these products unless the client is a sophisticated Investor etc.

You may wish to check out the Category 8 exemption under COBS 4.12.1 R here: http://fsahandbook.info/FSA/html/handbook/COBS/4/12

And Harry, yes, commissions have been known to be at the higher end!

The old rules apply - if it looks too good to be true...., and If you cannot explain exactly where themoney goes and how it works, don't sell it!

Richard,

I long ago gave up pretending to be able to pick funds, sectors, macro/micro et alii. I and my advisers provide advice according to client need, and in so doing take into account all the areas of impact that the taxation regime may bring to bear.

If our advice involves an investment vehicle - pension, ISA, unfettered collective, offshore/onshore bond - we then clearly analyse and document attitude to risk. Armed with this information we access a suitably correlated portfolio of funds. This fund of funds is automatically rebalanced to constantly fit attitude to risk, which will change only on client review and new attitude to risk profile.

Some HNW clients require more sophisticated investment advice e.g. VCT or EIS. These are the exception - 5 out of 2000+ - that prove the rule.

I am very comfortable with this state of affairs and never feel the need to up my stress levels by recommending unregulated funds.

Oh yes, and I gave up pin striped suits many years ago.

Interesting sample though

187 firms checked out of which 66 were advising/selling UCIS (35%) from which 74% were deemed unsuitable. Therefore 26% of the sample were deemed unsuitable.

A bit of a leap however to draw the conclusion that 25% of all IFAs are (a) advising on them or (b) advising badly.

I'm no statto but how was the pool selected?

Are all unregulated schemes bad per se, simply because they are unregulated?

What is the FSA's position on unregulated schemes in the wake of RDR and 'whole of market'.

No we don't by the way but have got a couple of shiny certificates!

These types of products are not new. I have seen many different designs over the years. I would hazard a guess that all the IFAs who opted to sell Mortgages and GI instead of doing exams saw these as a way of getting back into investment business. The generous initial commission was always going to be an influencer too. I have seen some disastrous results.

The FSA just want to give enough rope to let those who are tempted to hang themselves.

RDR won't stop this - there are advisers who are not qualified or registered charging fees to provide generic financial advice. So long as they don't recommend or advise on the suitability of products they appear free to carry on doing so.

Two guys are having a chat over a pint down at the pub. One's a nouveau riche punter who recently inherited some money, the other's an amateur investor who enjoys a dabble here and there on various types of investment scheme and has mostly done pretty well at it.

Says the first guy: I'm thinking of investing some money. Any ideas?

The second guy says casually: Well, I was reading up the other day on the new XYZ Investment scheme and it looks pretty good. I might put some money into it myself.

The conversation moves on to other things.

But the other bloke thinks, yes, that sounds good, I'll put £50K into it, which he duly does without bothering to seek further advice from anybody.

Unfortunately, the XYZ Investment Scheme is rather dodgy and goes down the pan.

So the first guy thinks: Christ, I've been stitched up here ~ who can I get back at to recompense me for what I've lost?

So he reports his mate to the FSA for bad advice on an unregulated investment product.

The FSA can find no trace of the second guy on their register, so out come the dementors and the guy gets clapped in irons not just for having given defective advice on an unregulated investment product but, Gadzooks, having done so in an unauthorised capacity!

That's where this is heading.

A product being unregulated doesnt suggest for a second that it is poor quality as I have seen mentioned in a comment. I can name plenty of regulated products that have performed badly. Marketing UCIS or non regulated investments direct to consumers shouldnt be an issue. It is the qualification and advice there after where the alarm bells start to ring.

Good IFA's should have an understanding of this sector and be able to recognise good from bad unregulated products and to know where these products can play a part in a clients portfolio.

For me the fsa should issue better guidelines on the marketing of these products. How are you suppose to bring these markets to the consumers notice without first knowing whether they are suitable clients.

Some are also pure balance sheet risks !

I think that these funds have their place. BUT and it is a big BUT it isn't with a retail audience. When you look at a lot of the structures of these more exotic funds, they are Experianced Investor Funds from Gibralter/Guernsey/IOM. If you actually look at the rules that are in place for these funds, they shouldn't be marketed to the general public. They should only be taken out (gibralter for example) by people who have at least £1m in investable assets. So it is not the unregulated funds that are a problem as the provide HNW a chance to set up a family fund without huge regulatory costs. Where they become a problem is when they are marketed to retail investors and the client due diligence is avoided by them being invested by a SIPP or offshore bond provider.

And lets not pretend that the real reason why these funds sell is because they usually come with 5-10% soft commission.

As usual we are overcomplicating a simple issue.

Generic advice is unregulated so that old school ties can give generic advice in their newspapers e.g. you should use your ISA allowance.

Regulated advice is (as far as I understand) saying you should use your ISA allowance by investing in Invesco-Perpetual's High Income fund.

So generic only advice allows half baked financial advice from unqualified journalists.

And the old school tie prevails.

Or am I just a cynic?

But to say that 25% of all advisers are at fault without checking every single adviser is nothing short of sensationalist rubbish.

Listen up everyone. You are generally all better than you think you are, better than the regulators think you are and better than even your clients think you are.

Sure, there are always some who want the fast buck and who care little (if at all) about the long-term effect of being "less than accurate".

But the vast majority of us should be proud of what we achieve!

And there's no cynicism from me there!!!

Thanks Phil for some informed comment, just what I would expect from an organisation like yours :)

Not sure if informed, educated comments are welcome on a forum like this though!

There's a clue in the name ' Unregulated Collective Investment schemes' - the FSA handbook makes it clear that it's a rule breach to advise on these UCIS funds to retail clients unless they satisfy a very tight criteria which probably means that your client is an 'investment professional' themselves.

If IFA's do advise on UCIS's they should do so with their eyes wide open in the knowledge that it'll probably be a 'FSA rule breach', not covered by the FSCS or most likely their PI insurance! Apart from that - no problem!

I've been approached by some of these UCIS providers who claim that UK IFA's can advise on their funds to 'experienced investors' and then don't point out what that the FSA have a definition for experienced investors which excludes virtually all retail clients and has nothing to do with what an IFA might think they look like. The fact that many of these funds have expected returns that ‘seem too good to be true’ and pay commission from a mysterious marketing allowance that the client isn’t paying for (really?) is frankly a secondary issue!

With 2000+ FSA regulated funds available why would an IFA want to support a relatively unknown UCIS fund with an unclear compliance path or worse? If a client complained the adviser wouldn't have a regulatory leg to stand on, their PI insurer would help and their friendly UCIS promoting company would point out that they didn't give the advice (assuming they’re still around to even answer the phone).

Advising on UCIS is playing with fire - be aware!

So:-

The unregulated can spout - Generic advise - totally unregulated.

Regulated advisers - can only give regulated advise - ever

But

Regulated advisers are allowed to communicate unregulated products to certain parties under certain conditions. See Phil B above.

Unless you know different ?

I agree with Dave (sorry Nick joke in there somewhere.)

The sooner poorly qualified or even unqualified IFA stop giving investment advice the better. Recommend a pension or some other tax wrapper, but when it comes to recommending which assets to buy, leave that to trained and qualified asset managers.

Can anybody point me to the source material for this? Nothing on the FSA website.

Here's a thought ~ what if a firm set up purely to advise on non-regulated products? It wouldn't have to seek authorisation from the FSA, would it? So, in theory, if the FSA came along and said it wanted to investigate the firm's activities, said firm could simply refuse on the grounds that as a non-regulated entity advising exclusively on non-regulated products, it is in no way answerable to the FSA. In theory. What powers does the FSA have to decree otherwise?

Er...Arch Cru; now that was a regulated fund, wasn't it?

and now Jon Maguire of Arch Cru fame is back with Voila

Julian - If you are referring to UCIS then an unregulated firm CANNOT advise a client, they can only promote under the exclusions available to them, which would mean they would need to ascertain that the client had a certificate of sophistication before muttering a word about the scheme, and even then, they can only talk about it,not advise.

As for UCIS, they may be termed unregulated but in fact most of the activities surrounding them are in fact regulated, including: 'arranging (bringing about) deals in investments', 'establishing, operating or winding up an unregulated collective investment scheme', 'dealing in investments as agent/principal', 'managing investments'... you catch my drift.

The issue is that the majority of UCIS are risky by nature and the client could lose all of their money, which is fine if the client is aware of this and can afford to throw £50K down the drain. Not all UCIS is bad and there is definitely a place for it amongst sophisticated investors. The FSA is right to question the advice on this but don't go criticising the product - it has its place.

If you want to criticise a product go after the 'No money down', 'Below Market Value' property agents who are ripping off retail clients on the promise of get rich quick.