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SIPP investors’ demand for unregulated collective investment schemes is on the rise, despite a series of high profile failings and regulatory warnings about the products.
Provider Suffolk Life said interest in UCIS, which can be based outside the UK and invest in more exotic areas such as foreign property, has doubled over the past two years.
UCIS now represents about 10% of all the investments the provider assesses each month, at an average of ten a week, following HMRC approval.
Greg Kingston, head of marketing at Suffolk Life, said: “The only problematic ones are those with little liquidity as we require any investment to be able to be liquidated or freely transferable within 12 months.”
However, rival Dentons warned in five years of holding SIPPs containing UCIS, it has never seen a single one produce the returns promised in the fund’s literature.
Martin Tilley, director of sales and marketing at Dentons, said SIPP individuals should be “extremely wary” of investing in the schemes.
“They never deliver what they promise, and are bordering on dangerous. We have investors with overseas property UCIS in their SIPPs going back five years which should have matured two years ago, but none of them have,” he said.
Tilley said investment in overseas property is “hugely speculative and at best high risk”. He suggested IFAs add value by applying a “sanity test” to UCIS for clients beguiled by fund promoters’ “benefit-heavy and risks-light” brochures. Tilley warned investors and IFAs not to take claims from UCIS “sales people” as gospel.
Potential investors should also visit the location for overseas property developments to do their own due diligence, he warned, citing a recent holiday to Cape Verde as an example of the reality of investing in a supposedly “up and coming” area.
The small island group off the west coast of Africa was the target of a large number of property developers before the financial crisis. But Tilley said he saw a region in its infancy which was hugely overdeveloped in terms of property, but without basic infrastructure like roads.
“It is extremely dangerous for anyone to invest in Cape Verde without having visited the islands,” he said.
Stirling Mortimer’s troubled UCIS, the Global Property fund, invested heavily in the islands through its No. 4 Cape Verde cell. The cell lost over €1m in net asset value in the six months to 31 December 2010, falling from €51.06m to €50.02m according to its end of year fund statement.
It also has a €6.3m black hole after a rogue lawyer from ELS International Lawyers, a firm hired by Stirling Mortimer, misappropriated €9.8m of investors’ money.
Under FSA rules, advisers can only recommend UCIS to certified sophisticated investors who understand the increased level of risk they pose.
The regulator recently fined IFA Specialist Solutions £35,000 for failing to adequately assess customers were eligible to receive UCIS promotions, and not ensuring they were given suitable advice to invest in the schemes. It follows an FSA decision to ban and fine £28,000 two partners at investment firm Clark Rees in February for similar UCIS advice failings.
The FSA’s clampdown comes after supervision and TCF assessment work in 2009 identified areas of concern in the recommendation of UCIS products within small firms. This led the FSA to conduct work with a selected number of intermediaries who operated in this market.
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Missing the point?
Whether the fund is a UCIS is surely irrelevant? The concerns raised in the article relate to investments in high risk asset classes. Not all UCIS funds will invest in such assets and some may well be totally appropriate investments.
Posted by: MN
Whose appetite?
In my experience this is not client but adviser led demand. Where the adviser is trusted [rightly or wrongly] the client is going to run with the 'investment' being recommended. Quite how the recommendation of many of these schemes is being justified defeats me. We are frequently approached by providers of such scheme, many of which are highly geared and typically off-plan. The propsectuses are a minefield, the schemes are usually resident in a Carribean Island and as has been mentioned, rarely provide the promised return. Presumably the excessive commissions being paid are only incidental to the recommendation of such schemes!
Posted by: Duncan Carter
Lack of clear reporting as to FSA guidelines re who/how ucis is sold
The statement in the article that "Under FSA rules, advisers can only recommend UCIS to certified sophisticated investors who understand the increased level of risk they pose" is not strictly true. COBS 3.11.2 states a firm may communicate an invitation to or inducement to participate in an unregulated collective investment scheme if the promotion falls within COB 3 Ann 5R Within the annex there are several categories however it is Category 2 which most IFA's will rely on: Category 2 person (1)A person (a)For whom the firm has taken reasonable steps to ensure that investment in the Collective investment scheme is suitable; and (b)Who is an “established” or “newly accepted” customer (see Notes 2 & 3) The key is suitability - Not every client wants the typical vanilla offering or model portfolio. It is important that both the IFA & client research the product/market etc before investing. UCIS is a type of investment vehicle not the investment itself. Therefore it is each offering must be judged on its own merits.
Posted by: J McT
UCIS = high risk?
Mutual funds in the USA are highly regulated and researched and many that are invested in bond portfolios are considered low risk, especially if they are invested in US Treasury bonds. Some of the fund managers are among the best in the business world wide. They are all UCIS because they are not regulated or even approved by the FSA. They are also a vital component of any well balanced portfolios.
Posted by: Festinalente
Mis-representation of Cape Verde
As a resident and significant personal investor in Cape Verde (Sal Island) I take great exception to the comments of Martin Tilley. If he properly researched Cape Verde he would know that what he describes as no roads, is in fact a major investment in new and attractive road network throughout Santa Maria, something which is wholly in line with increasing the value on Investing in what really is "up and coming" Cape Verde. The advise to visit is good advice, but the uninformed slur on Sal to those that don't or can't is nonsense. Sensible Due Diligence on the better Real Estate options in Cape Verde will show that there is realism in projections, and low risk with the major developments.
Posted by: Steve Crum
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CAVEAT EMPTOR
They encourage people away from institutional investments through Life Companies, destroy the infrastrucure that provides that safe' mechanism, encourage personal resonsibility and now complain that 'ivestors' are taking too much risk. IT IS THEIR MONEY AND SHOULD BE THEIR RESPONSIBILIY. Wanting the cake and eating it too comes to mind. Stop mollcoddling the public. Stop compensating them for their errors of judgement and get on with providing a decent service that they can come back to with confidence when they have learned that all that glitters is tinsell.
Posted by: Terence Patrick O'Halloran