2nd July 2013
PS 13/3: Restricting the retail distribution of UCIS
We take a look at the policy statement which sets out the new rules for the promotion of unregulated collective investment schemes (UCIS) and close substitutes.
Summary
The feedback from the consultation paper (CP12/19) was published earlier this month in PS13/3.
The vast majority of the 145 responses supported the proposal to protect ordinary retail customers from receiving inappropriate promotions.
The new rules will take effect from 1st January 2014 but firms that are able, may want to adopt them sooner.
It may also be a good idea to review any non-mainstream pooled investments (NMPI) your clients hold to ensure they're still suitable for their needs.
Read both papers in full
Why do we need new rules?
The FCA believes there has been an increase in the uptake of unregulated collective investments schemes (UCIS) by retail investors. This is thought to be because of the fall in returns of the more traditional investments (such as shares, fixed interest securities etc) and investors are turning to unregulated investments in the hope of achieving better performance.
The promotion of UCIS is currently restricted through primary and secondary legislation and the regulatory rules that are already in place and they can only be marketed to retail clients when an exemption is available.
However the FCA believes the rules are generally misunderstood or misinterpreted. This has led the FCA to conclude that the majority of UCIS sales may be inappropriate and exposing individuals to risks they do not understand or are not in a position to accept.
The FCA is proposing to further limit the promotion of UCIS and close substitutes and ensure they are recognised as specialist products that are not suitable for standard retail customers.
What types of product are included in the restrictions?
As well as investments structured as UCIS, the concept of non-mainstream pooled investments (NMPI) includes:
- Units in qualified investor schemes (QIS)
- Traded life policy investments (TLPI), and
- Securities issued by a Special Purpose Vehicle (SPV) 1, other than listed or unlisted shares or bonds.
The FCA will continue to review the market and may consider widening the NMPI concept or applying marketing restrictions to other products if it is felt necessary.
What are the new rules?
NMPI can be promoted to some types of retail customer (whether this is for direct investment or investment through a pension arrangement, such as a SIPP) if they qualify as:
- Certified or self-certified as sophisticated investors2
- Meeting the criteria of high net worth individuals3.
The FCA has also introduced:
- a new category that allows the promotion of US mutual funds to US citizens temporarily based in the UK, and
- A new exemption, which allows non UK UCITS (Undertaking for Collective Investment in Transferable Securities) funds that have not been recognised in the UK to be promoted to all retail investors subject to an initial suitability assessment.
This flow diagram, taken directly from Annex 4 of PS13/3, illustrates the application of the new restrictions when marketing non-mainstream pooled investments to retail customers.
Application of NMPI marketing restrictions to retail customers
Notes:
1 This category includes asset backed securities, Limited Liability Partnerships (LLP) and retail structured products where they take the legal form of an SPV and don't invest in listed or unlisted securities.
2 Article 23 or 23A of the Promotion of Collective Investment Schemes Order (PCIS for UCIS) and article 50 or 50A of the Financial Promotions Order (FPO for other non-mainstream pooled investments) – generally retail customers with extensive investment experience and knowledge, who are better able to understand the risks of complex and unusual investments.
3 Article 21 of PCIS Order (UCIS) or article 48 of the FPO (for other pooled investments) – generally annual income of £100k or more or net assets of £250k or more.
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