Jeff Salway: Don't go sticking your head in the sand

FROM ostrich farms and truffle tree estates to parking spaces and vineyards, the 'opportunities' promoted to investors in Scotland are varied and exotic, writes Jeff Salway

Ostrich farms are just one of the more unusual unregulated investments that have caught the eye of regulators. Picture: Getty

Unfortunately for those being persuaded to invest in them, however, they also tend to be high-risk and unregulated – typically leaving investors with nowhere to turn when it all goes wrong.

The City watchdog this week banned two pension company employees for investing almost £24 million of client funds into “potentially unsuitable” investments without their knowledge.

The case related to arrangements made between 2008 and 2010, but pension reforms that took effect in April 2015 have left older investors increasingly vulnerable to unscrupulous firms promising generous returns from unregulated investments.

The Financial Ombudsman Service (Fos) received nearly 600 new complaints about unregulated collective investment schemes (Ucis) and other unregulated investments in the year to the end of March, 59 per cent of which were upheld.

But many more have contacted the ombudsman about unregulated investments only to find that it isn’t able to look at the case, as unregulated investments are usually outside its remit.

The only time it can investigate such complaints is where the advice was regulated or the pension provider has regulatory responsibilities.

The same applies to the Financial Services Compensation Scheme, which means many people who have lost thousands of pounds to unregulated investments have little hope of getting their money back.

There are particular concerns over the number of Ucis being sold through self-invested personal pensions (Sipps), despite restrictions imposed on the sale of Ucis in 2013 by the Financial Conduct Authority (FCA).

The regulator last year referred several advice firms to enforcement after finding they had delegated their pension switching advice to unregulated third party firms that then transferred pension funds into high-risk Sipp investments.Unregulated investments tend to be related to some form of commodity or property. The “opportunities” currently being touted include investments in airport parking spaces, self-storage units, ostrich farms, overseas property, offshore wind farms, shipping containers, vineyards and films.

Such schemes tend to offer “guaranteed” income or growth ranging from 6 to 10 per cent, said William Hunter, director of Hunter Wealth Management in Edinburgh.

“This sounds fantastic, but it’s probably your own money you are getting back in these schemes as income, with little chance of ever getting your original investment money back.”

Some are simply scams, while others are just very poor investments, Hunter added.

“The range of choices in Ucis is huge, but most offer poor returns (if any) and a very poor secondary market, so most investors end up with something that’s extremely difficult to sell on and will never see their money back,” he said.

The losses in cases taken on by the Fos range from £10,000 to £1m. It has also seen instances where people were advised to remortgage their home to generate cash with which to invest.

Unregulated investments generally have one thing in common, according to the ombudsman – the only people who make any money out of them are those that set them up and those that sell them.

“Invariably the investments end up having no realisable value and transpire either to be fraudulent or very poor investments,” said a spokeswoman for the Fos.

“That’s not to say that all unregulated investments will fall into either of these camps – there are some that are perfectly legitimate – but the majority do.”

The problem for investors is that firms selling Ucis can be highly persuasive and sophisticated in their marketing. Some claim to be “Sipp approved”, an accreditation that doesn’t actually exist.

“When investing – whether in regulated or unregulated investments – we would always urge consumers to seek independent financial advice,” said a spokeswoman for the Fos.

“Those firms that are FCA-regulated will have their registration number on the website. However, if unsure you can check to see whether they are regulated via the FCA register.”

That can be found at https://register.fca.org.uk/, where you can enter a firm name to make sure they are authorised to give advice. If they are not, avoid them. And, remember – if it sounds too good to be true, it probably is.