Are you a sophisticated investor?

One of the central principles of UK mental health policy is that you have the right to be eccentric.

The fact that you wear diamond-patterned waistcoats and sport exotic facial hair doesn't mean you can be locked up.

The freedom to be different, even foolish, can also be discerned right across to the world of personal investing: people have a right to invest in whatever they like, no matter how risky or downright stupid their actions might seem to those around them. If you want to take a punt on off-plan hotel rooms in Brazil, that is your right.

However, as with the laws relating to mental health, things change when the boundary is crossed from being merely eccentric to being a danger to yourself or others.


The possibility of uninformed investors pouring their life savings into worthless assets or outright fraudulent schemes and then having to lean on the state to cover their living costs is not attractive to anyone but the hucksters who sell such dodgy products.

That is why, over the past decade or so, the UK financial authorities have been trying to crack down on the sale of certain asset types that fall outside the typical territory covered by financial regulation.

In October 2014 the Financial Conduct Authority (FCA) introduced a restriction on the marketing of contingent convertible securities by confining their promotion to sophisticated or high-net-worth investors.

Other products covered by similar restrictions include financial instruments referred to by the regulator as 'non-mainstream pooled investments', namely unregulated collective investment schemes (Ucis) - which can be based on some of the more esoteric investments such as plantations or film productions; lightly regulated 'qualified investor schemes'; life settlement investments; and 'special purpose vehicles' that act like investment funds but do not hold shares, debt securities or government stock as underlying assets.

Certain 'non-readily realisable' securities typically sold on crowdfunding platforms also fall under the restrictions.

In theory you have a right to buy what you like, but advisers and platforms have a responsibility to make sure you understand the risks involved - at least if they are authorised and regulated by the FCA.

To promote or sell these products to you, a firm must first ensure you fall into one of several special categories of investor. If you earn at least £100,000 a year or have at least £250,000 in assets, not including your home, you qualify as a high-net-worth investor, and a firm can put in front of you pretty much whatever it pleases. However, even if you don't have such resources, you can still buy unregulated products if you qualify as a sophisticated investor.

Allowing Ucis and the like to be promoted only to sophisticated investors seems at first glance to be a good move by the authorities to protect vulnerable investors from slick fly-by-night investment scams. However, in practice it's unclear how this protection will be put in place.


We spoke to representatives of both the Financial Ombudsman Service (FOS) and the FCA, neither of which could provide a specific definition of what a 'sophisticated' investor is, other than the rather vague 'really, really experienced'.

It is obvious that there needs to be a clear definition of who is and who isn't a sophisticated investor, for the benefit of both advisers and clients. If an investor feels they have been mis-sold an investment and complains to the ombudsman, how will it rule that the complainant was insufficiently sophisticated and therefore a victim of mis-selling, without a clear definition?

After digging through the rule book at the heart of UK financial services - the Conduct of Business Sourcebook - we found what looked, at first, to be the definition we sought. It is possible that the spokespeople we talked to simply weren't aware of the definition and that the caseworkers behind the scenes would be better acquainted with it. Nevertheless, the misconceptions - especially at the FOS - are worrying.

The rule in question says that investors can 'self-certify' as sophisticated if they satisfy one of the following criteria:

  • They have been a member of a business angel organisation.
  • They have had more than one investment in an unlisted company.
  • They have worked in the private equity sector.
  • They have been a director of a company with a turnover of £1 million or more.

This is very specific. Essentially the rule book says that if you are not a professional with experience in off-piste investing, you are not a sophisticated investor. If you meet one of the above four criteria and love throwing money at exotic assets, presumably you'll come up against having to self-certify sooner rather than later.

If on the other hand you are not one of the above, the premise of self-certification is unlikely to cross your radar.

There is another way to be recognised as a sophisticated investor, and that is to have your adviser sign you off as one.

In theory, the advice firm must conduct rigorous due diligence into your appetite for risk, capacity for loss and investment history before approving you. You will be given a statement to sign stating: 'I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested'.

A good and proper advice firm will be very careful who it signs off as a sophisticated investor, as it could end up being liable for mis-selling. It is in the adviser's interest not to be hasty in handing out sophisticated investor certifications. However, if an adviser's goal is to sell a Ucis, they may be tempted to push the boundaries a bit.


And what about unregulated firms that fall outside the jurisdiction of the FCA? An FCA spokesperson told Money Observer that although an unregulated firm promoting unregulated products will not fall foul of the FCA's rules, it could be breaking the regulations laid down in the Financial Services and Markets Act 2000.

There are exceptions where an unregulated firm could promote some kinds of Ucis to high-net-worth or sophisticated investors if they have been certified as such by a regulated firm. However, the Act ensures that for the most part they cannot promote unregulated products in the UK.

Note that the FCA rules specifically cover the 'promotion', not the sale, of Ucis products. So although a firm can't put a Ucis in front of you, if you go to it with the express wish of investing in a certain Ucis or other scheme, it is allowed to sell you one. Essentially, if you know about an investment, you are perfectly within your rights to buy it. However, a firm can't recommend it or draw your attention to it in the first place.

An advice firm may well say it doesn't think a Ucis is a good idea, but if a client is insistent and will not be deterred, the firm might follow their orders while covering its back with a certificate saying it did not recommend this course of action, or simply tell the customer to go elsewhere.

Andrew Pike, head of compliance at advice firm Fidelius, says that if a client persists in demanding access to whatever unregulated investments they might fancy, the advice firm can follow 'insistent client' rules and issue a written note saying it advises against a client's proposed course of action but will heed their wishes anyway.

'We wouldn't regard even accountants or stockbrokers as sophisticated investors,' says Pike. 'We would say they are specialised, they are professionals, but they may have not dealt with this type of product before. We would really push back unless a client had experience. We would recommend that they didn't do it, but if they insisted, we would note that down and send it back to them heavily caveated that we don't recommend it.'

Given that the rules cover the promotion rather than the sale of Ucis, there remains a risk that an investor might hear from a friend about what is, unknown to them, a bad investment and go directly to the unregulated or offshore provider to buy it.

As a Money Observer reader, you may be a more knowledgeable investor than most. But be very wary when considering alternative products. Remember that the FCA's concern exists for a very good reason.


Be on your guard, regardless of how sophisticated an investor you think you are. Martin Taylor, head of client relationships at professional negligence firm Rebus Investment Solutions, says many people who lose money through dodgy alternative investments rate their own ability highly.

He says: 'We have been dealing with a lot of cases recently where individuals with self-invested personal pensions have been sold inappropriate investments for their Sipp.

'We have a guy who was advised to transfer his final-salary scheme into a Sipp, and it was liquidated and transferred into five investment schemes. The adviser put the funds into five Ucis in the property sector. The Sipp was worth £400,000 when it was invested; it's now worth less than £100,000.'

After the financial regulator banned the promotion of Ucis in 2013, Rebus claimed the ban was '10 years too late'. Taylor adds: 'We estimate that approximately 120,000 investors have invested in between three and eight Ucis products.

'When you consider the [regulator's] prediction is that 90 per cent of these investors should never have been shown these schemes and that 70 per cent of those were actually mis-sold schemes, it becomes clear how big a problem this is.'

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