Debunking the UCIS regulation myth

Debunking the UCIS regulation myth



Following the FSA’s announcement that unregulated collective investment schemes (UCIS) are only to be sold to ‘sophisticated investors’, as opposed to retail investors, this model has attracted a degree of negative attention. 


For the specialist investor, however, such funds can still prove to be a worthwhile and sound undertaking. In an article written for Investment Week, Christian Faes of Montello Bridging Finance explains why UCIS should not be considered a dirty word…

The headlines surrounding UCIS funds are almost always unhelpful, and this is often a frustration for us, as it is simply not correct to treat all UCIS funds with the same scepticism.

The FSA recently announced it was going to ban the sale of UCIS funds to retail investors. This, of course, came as no surprise to anyone that was familiar with UCIS schemes. In fact, the most surprising thing to us was the revelation that some advisers may still be promoting UCIS funds to retail investors.

Having said this, UCIS funds are suitable – and, in some instances, sensible and sound investments – for many categories of investor. The FSA has issued a number of papers providing guidance on good practice for the sale of UCIS funds, which are openly accessible to high-net-worth and sophisticated investors through their advisers.

The problem with regulation

Over the course of the last few years, a number of funds have blown up. This is unfortunate, and obviously does not help the market environment for alternative investments. However, many of the funds that have failed – if not the vast majority – were actually regulated funds.

One of the most disastrous stories of the last few years in the UK was the failure of Arch cru, in which losses have tallied into the hundreds of millions of pounds. Years later, this fund and its implications are still unwinding. Often lost in the story is the fact Arch cru was a fund that was duly regulated and authorised by the FSA.

When a UCIS fund fails, the headline and the thrust of any commentary seem to highlight the unregulated nature of the fund. Instead of being a passing comment in relation to the fund’s failure, more often than not the story itself centres around the fact the fund was a UCIS.

One recent fund that has failed, and is a little closer to home for us, was the Connaught Income fund. The Connaught fund was a UCIS that invested in bridging loans, and lent money to one of our competitors in this market.

Although it is not for us to hypothesise on what went wrong with that fund, it seems clear from the information available that the fund’s failure was not a result of it being unregulated, nor was it a failure of the asset class in which it was invested.

In many respects, the very name ‘UCIS’ is a misnomer and somewhat misleading. The fact is that an unregulated collective investment scheme can only be operated by an FSA authorised and regulated entity. Any adviser that is recommending or advising on a UCIS fund must also be authorised and regulated. So what is called an ‘unregulated’ fund, at least on the face of it, is actually quite a regulated fund structure.

What is not regulated under the UCIS regime, however, is the asset class in which such ‘unregulated’ funds can invest. This is why a UCIS structure is often the most suitable, if not the only viable fund structure available, for certain investment funds.


For a UK fund to be regulated and authorised by the FSA, it needs to be either a UCITS fund (which stands for “undertaking for collective investment in transferable securities”), a Non-UCITS retail fund, or a Qualified Investor Scheme.

A UCITS fund complies with the European Union directive 2001/107/EC. Note that a UCITS fund should not be confused with a UCIS fund, as they are entirely different beasts.

The three different classifications have different rules on the types of assets in which the relevant structures can invest. In the case of short-term real estate backed loans, there is no regulated fund structure that fits neatly.

The loans our fund invests in are short term in the world of mortgages, but in the world of modern day investments, they are not considered particularly liquid. There is also the prospect that the fund may from time to time actually hold real estate assets, in the event it forecloses on a property and needs to take possession. These factors make structuring a fund that can invest in this asset class quite difficult.

A UCITS fund, generally speaking, can invest in a wide range of assets, such as listed equities, corporate and government bonds, and derivatives. 

However, as the acronym suggests, UCITS funds need to invest in ‘transferable securities’ that are liquid.

Liquid in this sense means the asset can be sold in no more than seven business days. Obviously, a fund that invests in short-term real estate loans is not going to be able to be structured as a UCITS.

A non-UCITS retail scheme (otherwise known as a NURS) can also invest in a generally broad class of assets, including those that would be allowed in a UCITS, and other assets (such as gold, real estate and other unregulated funds).

While broader than a UCITS, it can only invest up to 20 per cent of the fund in ‘unapproved securities’. Again, this structure does not work for a short-term real estate finance fund.

Finally, a Qualified Investor Scheme (QIS) is a fund that is only open to certain sophisticated investors, as prescribed by the FSA. These schemes are expensive and time consuming to set up, and require not only the fund itself, but also the manager, to be authorised and regulated by the FSA.

From start to finish, to obtain authorisation as an asset manager and then to have a QIS prospectus approved by the FSA can take many years. This type of scheme is more the domain of large institutional funds and sophisticated hedge funds.

Coming back to the Unregulated Collective Investment Scheme structure, it is easy to see why there are many funds that opt for this model. 

Investors and their advisers should understand that not all UCIS funds are set up for Bulgarian property, wind farms or other entirely obscure investments. In short, UCIS should no longer be a dirty word for investors.


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