Four things worrying us more than ETFs

The Bank of England (BoE) has turned its attention to the potential risks of exchange-traded funds (ETFs) in its Financial Stability Report. But rather than singling out these Ucits-regulated funds for scrutiny, should the BoE be paying more attention to arguably riskier products on the market?

Here are four things that scare us more.

Unregulated Collective Investment Schemes (Ucis)

While ETFs fall under the European Ucits III guidelines, as well as the rules of the stock exchange on which they are listed, there are certain products that escape these forms of regulatory oversight.

Ucis products deserve greater attention and pose potential mis-selling risks. Ucis are not authorised, although the person carrying out activities in relation to Ucis comes under FSA regulation.

The FSA said Ucits are seen as having a high degree of volatility, illiquidity or both, and should be regarded as speculative investments. It said: ‘This means in practice they are rarely regarded as suitable for more than a small share of an investor’s portfolio.’

Jonathan Gain, chief executive at Stellar Asset Management, said: ‘The rules around having a regulated fund – like listing, liquidity and spread of assets – are things you don’t get down the Ucis route. As they are unregulated, the FSA prescribes they can only be distributed to certain categories of individuals. Advisers have to determine whether investors are suitable for this. However, some advisers haven’t done their due diligence.

‘It would be unfair to single out Ucis, but it has got attention because of the concentration in assets – there would be total failure if that asset class went down. The FSA has been censuring firms and stopping them from Ucis business.’

He added Ucis are also not covered by the Financial Services Compensation Scheme (FSCS) because it is only the manager who can be covered.

Unauthorised companies, bogus funds and the ‘boiler room’