INVESTORS have been told to be vigilant as unscrupulous advisers push high-risk unregulated investments before a ban on selling them takes effect next year.
The City watchdog has outlawed the sale of most unregulated collective investment schemes (Ucis) to ordinary investors amid concerns over mis-selling of the products. However, the change doesn’t come into force until January 2014, raising fears that some investors will be targeted in a “while-stocks-last” sales surge.
Their unregulated status gives Ucis the freedom to invest in esoteric assets – such as timber, wine, wind farms and traded life policies – that are often based offshore and out of bounds to regulated investment schemes.
More than 85,000 people have Ucis holdings, the Financial Conduct Authority (FCA) has estimated, with the market worth more than £2.3 billion.
Concerns over Ucis have escalated over the past couple of years as a growing number of ordinary pension savers and investors have signed up for the schemes, leaving them at risk of potentially ruinous losses.
The new FCA rules will restrict the promotion of Ucis to high net worth and sophisticated investors for whom they’re likely to be suitable. It defines “high net worth” as those with annual income above £100,000 or with investable assets of more than £250,000.
Some products have been exempted from the ban, including tax-efficient investments such as venture capital trusts and enterprise investment schemes.
Chris Woolard, director of policy risk and research at the FCA, said: “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.
“However, we have also taken into account that for some investors these products can still be appropriate.”
Research by the City regulator found that just one in four sales of Ucis by advisers to their clients was suitable, with many breaching marketing rules.
Tom Munro, owner of Tom Munro Financial Solutions in Larbert, said the regulator’s decision was “unquestionably” correct.
“The FCA is right to ban the promotion of Ucis that contain speculative and obscure underlying assets such as fine wines, crops, timber and traded life policies,” he said.
“For the higher net worth speculative investor, there can be some merit investing in certain high-risk areas as part of a balanced portfolio, but for the majority of UK retail investors, these investments are clearly unsuitable.”
He claimed Ucis were typically sold by advisers not competent to transact and discuss such investments.
“They have simply browsed through the glossy brochure without understanding the risk involved, which has led to substantial losses for investors,” said Munro.
More than 30 financial advisers have been fined or banned by the regulator for mis-selling Ucis. They include Patrick Francis O’Donnell, director of P3 Wealth Management in South Queensferry, who was found to have sold 57 clients into Ucis. Among them were a forklift truck driver and his wife, who O’Donnell persuaded to shift their life pension savings into high-risk Ucis.
The size of the Ucis market could shrink to as little as £700 million once the clampdown begins, according to the FCA. It urged firms to comply with the changes ahead of the deadline in January.
However, the delay before the rules take effect has sparked fears that investors could be targeted by advisers selling Ucis while they still can.
Barry O’Neill, investment director at Carbon Financial Partners, said: “The January 2014 implementation date means that there is a real and present danger that more vulnerable investors will end up with an unsuitable product that neither they nor their adviser truly understands.”
There’s also a danger that as the market shrinks, investors with money already in Ucis will find them increasingly illiquid. In other words, it will become very difficult to extract their capital from their investment as the money going into the schemes declines.
He advised investors to keep in mind the old maxim that if it seems too good to be true, it almost certainly is.
“Only today I received an offer from a Ucis promoter of an all-expenses-paid week-long trip to an exotic island to see a property development there,” said O’Neill. “Things like this should set the alarm bells ringing, but for the promoter it’s a numbers game and eventually some adviser will fall for it.”
Many people have been sold into Ucis through self-invested personal pensions (Sipps). Some advisers have taken advantage of the lack of clarity over what can be invested in through Sipps to move clients into Ucis, with overseas property especially prominent.
“Promoters understand the quirks of behavioural finance whereby some people believe a Sipp is so long-term in nature that a short-term ‘flutter’ on something that seems more exciting and lucrative can’t do any harm,” said O’Neill. “Sadly this couldn’t be further from the truth in most cases.”
Firms will still be able to advise clients on Ucis they have taken out already. But consumers with investments they believe may have been sold inappropriately, or which they simply aren’t sure about, should contact their financial adviser for more information on the investment.
If you have a complaint and the firm doesn’t deal with it to your satisfaction within eight weeks, take the matter to the Financial Ombudsman Service (Fos). It can be contacted on 0800 023 4567 or by e-mail at firstname.lastname@example.org. However, there is no guarantee that the Fos will be able to look into it, due to the nature of Ucis.
“For the vast majority of unsophisticated investors, there is of course the risk these incomprehensible products will continue to be pushed,” said Munro.
“But be warned that the clue is in the title. As the name clearly states, this type of investment is unregulated, so you may not be protected by the Fos or the Financial Services Compensation Scheme when things go wrong.”