The promotion of unregulated risky investments such as fine wine, crops, timber and traded life policies to retail investors has been banned by the City regulator.
The Financial Conduct Authority has published its final rules banning the promotion of unregulated collective investment schemes (Ucis) as well as some similar products to retail investors in the UK.
Promotion of these ‘riskier and often very complex fund structures’ will now be restricted to sophisticated investors and high net worth investors to whom the products are likely to be more suitable. The rules come into effect on 1 January 2014.
Underlying assets sometimes held in Ucis include fine wine, crops, timber, speculative financial instruments and traded life policies. According to the FCA, these are high risk investments that may be illiquid, difficult to value and have volatile prices.
Similar products that will also be banned to retail investors are qualified investor schemes, and special purpose vehicles (SPVs) that invest in anything other than shares or bonds.
The rules come after a lengthy consultation by the FCA’s predecessor the Financial Services Authority. There had been concern in the investment industry that the ban may be wider and incorporate more mainstream products too.
However, the FCA says exchange traded products, overseas investment companies that would meet the criteria for investment trust status if based in the UK, real estate investment trusts, venture capital trusts, enterprise investment schemes (EISs), seed enterprise investment schemes and SPVs that pool investment in bonds and shares lie outside the scope of the marketing restrictions.
The regulator says firms operating those products still need to ensure promotional communications about them are ‘fair, clear and not misleading’ though.
EIS provider Kuber Ventures says the uncertainty over whether EISs would be included in the promotion ban has had a critical impact on fundraising. The firm welcomes the clarification and predicts that EISs could now look forward to up to £2.5 billion of investment each year.
Christopher Woolard, director of policy risk and research at the FCA, comments on the promotion ban: ‘Consumers have lost substantial amounts of money investing in Ucis and similar products in recent years so the need to introduce new rules to prevent this from continuing was essential.’
He says the rules ‘strike the right balance’ as companies will still be able to promote the products to sophisticated and wealthy investors.
The FCA will continue to review how risky products are sold to the public. It says it will also consider extending the scope of the rules in the future and may do this temporarily before conducting a consultation.
Adrian Smith, director of independent financial advisers ASPL, says most investors shouldn’t go anywhere near Ucis. ‘The clue’s in the name – unregulated. They are esoteric and mostly offshore products.’ He says companies come up with ‘more esoteric and more extreme’ products to try and attract investors desperate for higher returns.
‘The FCA wants to pre-empt investment crises happening. There’s also talk about the FCA pre-approving products,’ he adds, to avoid problems in the future.
Monica Gogna, a partner in the financial regulation team at law firm Pinsent Masons, comments on the FCA promotion rules: 'This announcement marks a clear line in the sand that the regulator wishes to impose between retail and non-retail investors. However, the question remains as to whether, in time, this willingness to ban products may lead to a real block on product innovation, which can also potentially cause detriment to the consumer.'
To find out what traded life policies are and why the FSA previously classed them as high risk, read our article here.