How to market Ucis safely

quite right all of the above. the danger of these funds is not that they exist, it is that they are recommended to the wrong people. if the client is wealth and sophisticated, there is no problem in a small portion of their portfolio going into a well researched UCIS type arrangement. The real issue with these funds is where the client isn't sophisticated and a large part of their portfolio is placed into the UCIS investment.

having worked for an offshore life company, we noticed a marked reduction in the number of investments placed in UCIS funds when a rule was introduced that insisted that the clients signed the paperwork confirming that they were sophisticated investor. the suggestion being that offshore bonds (as the investor) were being used as a way for less sophisticated clients to be placed into these funds.

I would urge IFA's to complete thorough due diligence and avoid fund distribution / marketing companies

So, Ian suggests that investing into a Unit Trust or ETF is safer and less dangerous than a brazilian teak fund or a student accommodation fund. Is thsis the case no matter what the underlying investment of the Unit Trust or ETF, just because it is available on a Wrap platform and authorised in the UK ? Should it not be more a case of analysing the underlying assets held within whatever investment is being recommended to the client ? All Unregulated Collective Investment Scheme are not the same and each should be judged on its own merit. IFA's should be wary of hiding behind the cloak of UK authorisation when recommending suitable investments for clients.

mark1 is right, you do also have to look at the risks of the underlying investments in the scheme. But, assuming similar assets, UCIS are considered a much higher risk than an equivalent UK Regulated or Recognised CIS, on a like for like basis, because of the lack of Consumer Protection.

With UCIS the failure of the Scheme could result in the client getting back no money at all, but with a UK CIS they might get some return under the UK Financial Services Compensation Scheme.

This is the main risk that concerns the FSA, and why they consider UCIS suitable only for High Net Worth/Sophisticated investors. As a rule of thumb the amount invested in UCIS (in total) should probably be less than 5% of the clients assets, excluding the value of main residence and pensions.

There are many reasons for funds remaining unregulated. These are often about not fitting in with the standard template for funds as set by the regulators. A new asset class will struggle with authorisation until its existence is acknowledged.

The main thing that the adviser needs to do is understand the nature of the underlying investments in the funds, how they work and risk factors. Then they need to satisfy themselves that a UCIS fund fits in with the investment strategy of their customer regarding investment risk, liquidity or other aspects of each fund.

To make a broad brush statement about UCIS as if they are all the same is borne out of ignorance.

Unfortunately, advisers have a historically huge propensity to abuse products and funds by selling to the wrong people for the wrong reasons because either they have not done enough research or due diligence or they do not really understand the product or fund and want to appear to be clever by offering some esoteric choice to their clients .

It is a shame that the FSA has such a poor understanding of investment risk. Then it is ironic that the FSA issues guidelines about funds from such a weak position in this respect.

Well put Jon. I fully agree. The point I make is that you should not just close your eyes to all unregulated investments. There are many which have provided consistently good returns for clients. The fact is that, due to overcomplicated regulation in the UK, there are some asset classes which simply cannot operate in the UK. As you say, where there are similar assets available, one should almost always defer to the regulated one, for client protection.

And perhaps someone could comment on a scenario that does not compute, and that is what to do with an insistent investor who is neither sophisticated or high net worth ?

My opinion is that while we may like it or not we must refuse them - but I would be interested in other comments

Alastair - your solution would be to pass the client to Mark or Tony who both seem to have a sensible approach UCIS.

I agree, not all are the same and should be assessed in thir own merit - its just too easy (and lazy) to tar them with the same brush..

Are all the funds listed on the NYSE considered UCIS?

@ Festinalente

Yes, they may well be regulated in their home country but not regulated in the UK by the FSA.

@alistair

You are correct they should be advised that the product is not suitable.

But I am sure the fund operator or pension trustee would find a way if the client was very insistent.

This really has been under the spotlight in recent week. Most of the concern centres around their promotion and suitability of the investment.

Unregulated collective investments cannot be marketed to the general public. This type of investment can normally only be promoted, to clients who are professional clients, eligible counterparties, investors currently participating in unregulated collective investments, or have done so in the last 30 months. In addition, if a firm has undertaken an assessment of a client’s expertise, knowledge and experience and the assessment gives adequate assurances that the client is able to make his own investment decisions and understand the risks, then such products can also be promoted to that client.

Following the introduction of MiFID in November 2007, a non-MiFID firm is only able to advise on unregulated collective investments emanating from either a regulated firm (e.g. a fund manager regulated by the FSA), or from a foreign firm approved by the FSA as having regulation nominally the same as the UK. Any firm wishing to advise on unregulated collective investments which are not provided by a regulated firm must comply with certain MiFID requirements and in order to do this the firm will need to become an exempt CAD firm. To become an exempt CAD firm you will need to apply to vary your permissions; you will also need to make changes to your systems and controls in line with the common platform requirements outlined by MiFID if you have not already done so and you may also see changes to your capital requirements depending on the PI cover that you have in place.

I would recommend that before advising on an unregulated investment, you speak to your PI insurers to ensure there are no issues with you advising in this area.

I would suggest that if you are advising on products such as this you should explain the mechanics of the investment and the relevant risks associated with the fund. You should also highlight the following points to the client to explain the additional risks associated with an investment of this nature:

- The product is not regulated by the FSA.

- The product is not covered by the Financial Services Compensation

scheme

- The client will not have access to the Financial Ombudsman Service.

- That legal action may be the only route available to him/her in the event of

a dispute.

- That they should take advice from a solicitor and/or accountant prior to

entering into the investment to discuss the legal and tax aspects of the

investment.

- That the client has no cancellation rights in respect of the investment.

Tony Sanchez

info@claracapital.co.uk

Why can a UCIS e.g. Warren Buffet's Berkshire Hathaway only be marketed to sophisticated or high net worth individuals? Does it really make sense that you can sell a fund of extinct UK coal mines if it is registered but not a AAA, 5 star, low risk US Gov/t bond fund if it is not registered?

Festinalente. It is because of the Consumer Protection. If a UK registered Investment Scheme collapses, then a client will be protected, to a certain extent, by the UK Compensation Schemes. With Unregulated Schemes, the client would have no recourse, except perhaps through the courts. They could loose all their money through fraud or mismanagement and get nothing back. This is the main reas why UCIS are considered higher risk - nothing to do with the underlying assets.

We are getting into the blurs of a wider debate it is far too easy to pretend that all UCIS is just about some high commission paying dodgy funds so no need for IFAs to give due consideration? I think not, some of the esoteric offerings coming out are closer to what consumers actually want and some just a rubbish smokescreen for high opaque charges.

Perhaps if IFAs were to be qualified to manage investments like stockbrokers etc. and jump through a few more exam hoops this will be OK and the FSA would trust us to “manage clients money”

RDR level 4 does not say you are competent to do this.

If your excuse is more Fund of Funds & Manager of Manager after the event these could be seen as the UK authorised opaque smokescreens to higher charges.

Independent means consider all options not just those that are packaged (collectives) so how much investor protection exists when I say to client buy at ETF or low and behold a direct Share in the new world.

Real debate we should be getting into has more blurs!

Retail vs. Institutional

UK vs. Offshore Fundss

UCIT3 vs. UCIS.

When the no rebates on wraps come into place and you are offered a 1.5% AMC retail fund with the investor protection or a 0.75% Institutional share class without this will be a dilemma for advisors.

Will a discretionary manager be able to receive fund group rebates if buying retail class. Can same discretionary pass back to client cash account?

Also if buying only UK regulated share classes of Oeics you need the tax wrapper to be able to claim back any tax. Which platform /offshore bonds/ SIPPs can actually do this. Many of the platform personal pensions allegedly don’t bother. This is perhaps a bigger TCF issue than the industry wants to tackle at the present time. I think the product wrapper has a duty but this is hidden by the providers.

Don’t hear much about domicile and currency of funds in this debate, perhaps clients planning to spend in another currency.

Lastly what about new asset classes that are not available via the laggard Fund houses/ life companies/ platforms.

IFAs need Citywire to open the debate with the FSA on bigger mandate if RDR is to get better consumer outcomes.