The FSA’s recent release of its annual Retail Conduct Risk Outlook Paper 2012 highlighted the regulator’s concern that Unregulated Collective Investment Schemes – commonly known as UCIS – may be being mis-sold to consumers.

Having read the regulator’s paper here at B&C, we decided to take a closer look at UCIS funds, which are often utilised by lenders within the bridging and commercial industries, to find out more.

We contacted Cerris Tavinor, of the Communications Division of the FSA, who said: “The fundamental issue is that there are statutory restrictions around UCIS and who they can be marketed to.”

Whilst UCIS are not regulated in the same way as Collective Investment Schemes (CIS), any persons ‘carrying on regulated activities in the UK in relation to UCIS (including providing personal recommendations, arranging deals and establishing, operating and managing schemes) will be subject to FSA regulation’. Section 238 of the Financial Services and Markets Act (FSMA) prohibits promoting UCIS by authorised persons except where a relevant exemption is available, including:

-      Certified high net worth individuals

-      Certified sophisticated investors

-      Self-certified sophisticated investors

-      And individuals that fall in one of eight categories detailed in chapter 4.12 of the FSA Conduct of Business Sourcebook (COBS).

Mike Davies, chairman of Connaught Asset Management, explained to us that, “The FSA defines in its own Rule Book, COBS 4.12.1 to be precise, the categories of investor to whom an intermediary can ‘sell’ a UCIS. The categories are very much broader than simply ‘institutional’ and amount to more or less anyone that the intermediary decides the fund is suitable for and who will understand the nature and risk of a particular UCIS fund.

“It is suitability and understanding that is the key here, not simply one broad definition of category. At Connaught, as a responsible product provider, we want to see our products in the hands of the right investors and we have a number of mechanisms for this:

- Our Fund documentation spells out clearly to whom the product is targeted and the risks they need to consider before deciding to invest.

- The application form collects the intermediaries’ personal details, including the firm’s or individual’s FSA Register Number, and the first hurdle before an investment is accepted is to check the intermediary has the appropriate permissions.

- Our BDMs are constantly in touch with their intermediary clients and as part of the communication process will ensure the intermediary is promoting our product compliantly, which will include discussing with the advisors just what compliance looks like.

- For the past two years we have travelled the UK delivering a series of seminars on the compliant selling of UCIS products, seminars that do not even mention Connaught’s own products.”

Mike Davies continued, “We can only speak for Connaught’s product range, but the reason our funds are UCIS products is that the asset class, which is a single asset class in each Fund, does not allow it to be a regulated product such as an Open Ended Investment Company (OEIC).

“For us, the benefit of a UCIS product is that there is much more flexibility in the choice of asset types than if we went for a regulated fund. The majority of our Funds invest in short-term loans secured on residential-type property, with an aggregate loan to value currently of around 65 per cent. In other words, because it is a UCIS we have been able to select a simple secured asset class, whereas if we promoted an OEIC we would need a range of asset types and a range of risks.”

What about the potential for redress?

Cerris Tavinor explained to us that the FSA doesn’t offer redress. “In general terms, if we carry out investigations and discover redress is required, then we would require the firms to calculate and offer appropriate redress.

When we asked the regulator whether it will be bringing in new rules addressing consumer protection (the FSA is proposing to look in more detail at UCIS later in 2012), B&C was told: “We can’t pre-empt that announcement, but we wouldn’t make changes without consultation.”

Cerris stated: “To help firms understand the FSA’s view of the 15 highest priority conduct risk areas, the FSA will be holding a series of roadshows.”

By Miranda Atty