Unregulated Collective Investment Schemes (UCIS) – a type of funding utilised by a number of bridging lenders – have been spotlighted by the FSA, following its publication of proposals to ban the promotion of these types of products to the vast majority of retail investors in the UK.

An FSA press release stated that the proposed rules will mean that the promotion of such schemes will be generally restricted to sophisticated investors and high net worth individuals for whom the products are more likely to be suitable.  

Currently, UCIS can be promoted to ordinary retail investors if an adviser first assesses the product’s suitability. 

The consultation paper, which follows FSA research that found that only one in every four advised sales of UCIS to retail customers were suitable, should prevent firms from marketing UCIS to ordinary retail customers even in the context of financial advice. 

The FSA is acting because of the high levels of unsuitable advice it has uncovered and the potential for customer detriment. Examples include:

• Pensioners being advised to invest all of their wealth in a single, illiquid UCIS with a view to generating income; and

• a customer advised to borrow money to invest in UCIS and service the debt with withdrawals from that investment.

A number of non-mainstream pooled investments have failed completely in recent years, leading to total investment loss for customers.  

Certain other products can carry similar risks to UCIS but are not currently subject to the same marketing restrictions and can be widely promoted in the retail market. In this consultation, the FSA proposes to introduce new rules for them to create a level playing field and improve standards of consumer protection.

Explaining the proposals further, Gavin Stewart, Acting Director of Policy, Risk and Research at the FSA, said: “Product risks can be much greater on UCIS and similar products than on more mainstream investments and we have found that the majority of retail promotions and sales fall a long way short of our existing standards. 

“This is important because it is exposing ordinary investors, for most of whom these products are clearly unsuitable, to significant potential for large losses on what are often esoteric and illiquid investments. This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future. 

“We estimate that the UCIS retail market is worth around £2.5 billion in the UK. A total of 85,000 ordinary retail investors have direct holdings in these investments, which can hold assets like traded life policy investments, fine wines, crops and timber. Another £1.5 billion is invested in products, such as securities issued by special purpose vehicles, which can carry similar risks for investors. Under our proposals, firms should only promote these products to people for whom a UCIS or similar product is more likely to be right.

“While we have found problems with a number of sales, we are not saying that all existing investments were mis-sold. Existing customers who have questions about their investment may want to contact a financial adviser.  Advisers will be able to help explain how the investment works, whether it is still right for them and what their options are.”