Top tips to advising on UCIS

David Ingram, director of threesixty Services, explains how to advise on unregulated collective investment schemes in a compliant fashion.

Unregulated collective investment schemes (UCIS) have been with us for many years but it is probably fair to say they came to the fore from 2007 onwards when returns under more conventional investments were poor and clients were seeking advice on how to achieve the sorts of returns they had become used to over preceding decades.

And it is important to recognise that not all unregulated investments are collectives. The current concerns are around UCIS simply because the FSA’s review concentrated on UCIS; it is probably a safe bet that many of the problems the FSA identified will apply equally to some other investment types.

The FSA published its findings in a document entitled Unregulated Collective Investment Schemes – Project Findings, which was quickly followed by a further document Unregulated Collective Investment Schemes – Good and Poor Practice Report. Both these documents should be seen as compulsory reading for anyone intending to operate in the UCIS market and anyone supervising, assisting or managing such an adviser.

If you do not currently have an investment process which covers UCIS, the good practice examples will be an excellent guide.

It is important to note that the FSA’s requirements around UCIS are not new, they have been around for a considerable time and are pretty clear.

The key to advising properly and safely on UCIS investments is to have a robust set of procedures in place and to follow them.  The FSA has not said UCISs are inherently ‘bad’, the concern is the ‘processes’ followed by the majority of the firms within the review were not adequate.

Major concerns identified within the report include:

• Firms believing ‘unregulated’ means the FSA’s rules do not apply to their UCIS business.
• Firms not being aware of the statutory restrictions on promoting UCIS to the general public and the exemptions from those restrictions.
• Inadequate training of sales staff based on the above misunderstanding of the meaning of ‘unregulated’.
• Complaints not being investigated properly based on the same misunderstanding.
• Failure to supervise selling staff or monitor business, again due to this misunderstanding of ‘unregulated’.
• Lack of awareness of what constitutes a financial promotion.
• Poor asset allocation.
• Failure to properly assess knowledge and experience.
• Failure to identify the risks of UCIS to clients.

While the FSA does not regulate these products it does regulate their promotion and most ways of bringing these investments to a client’s attention, written, verbal, physically handing them a copy of the information memorandum or sales literature, presenting at a client seminar etc, are a form of promotion.