Pension savers have been told to leave assets such as art and wine to the experts after the City watchdog launched a crackdown on high-risk investments.
The Financial Services Authority (FSA) said the promotion of unregulated collective investment schemes (UCIS) and similar products should be restricted to “sophisticated investors” and those considered “high net worth”.
The proposed ban came amid concerns that thousands of normal investors and pension savers have money in unsuitable assets that pose a risk of heavy losses.
The fact that they aren’t regulated – and therefore not covered by the Financial Services Compensation Scheme – gives UCIS greater freedom to use esoteric or unorthodox investment assets or strategies. UCIS often invest in assets such as traded life policies, wine, art, wind farms, crops and timber, many of which are also based offshore.
However, their unregulated status also means that people are at more risk of losing their money than in more conventional investments, according to the FSA.
It believes that about 85,000 people have direct holdings in the UCIS retail market, which is worth around £2.5 billion.
Under the FSA’s new proposals, UCIS should only be promoted to those who earn more than £100,000 a year, have more than £250,000 to invest or who are experienced investors.
Barry O’Neill, investment director at financial planning group Carbon Financial, said: “The spectrum of UCIS offerings is extremely wide, but one thing is common across the genre: they really are not suitable for most inexperienced investors. The layers of complexity in some cases confuse not only the end consumer, but also the adviser recommending them.”
The very nature of the assets usually accessed through UCIS poses a risk too, noted David Thomson, chief investment officer at Glasgow-based VWM Wealth Management.
He said: “Investments in esoteric areas such as fine wine or plantations require specialist expertise in order to obtain the best returns. This typically results in a high level of charges and in many areas the investment term can be very long with little or no prospect of selling your investment in the interim.”
Pension savers are especially disadvantaged, he added. “There is a real danger of being locked in – not at all handy if you need income from your pension.”
The appeal of assets such as art and fine wine is clear. Not only do they often reflect the investor’s personal interest, but they can offer valuable diversification within an investment portfolio. The problem, however, is that they can be very unpredictable, said Thomson.
“Investors have to be very careful that they have not missed the boat and been sucked into an area which has already performed well when most of the gains have already been made,” he explained.
An FSA study of the market deemed three-quarters of advised UCIS sales to private investors to be unsuitable, in terms of the customer’s needs and requirements.
It uncovered cases of pensioners being advised to invest all their money in a single UCIS that didn’t offer easy access to capital.
The regulator also raised alarm over the use of special purpose vehicles (SPVs), which are used to give investors exposure to assets usually found in UCIS.
The risk of the assets held through UCIS, SPVs and similar structures are often difficult to assess, according to the FSA.
“These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are often actually higher-risk investments,” it warned, adding that some are “susceptible to catastrophic loss of value”.
Several such investments have failed entirely in recent years, with people losing all the money they have invested, according to Gavin Stewart, acting director of policy, risk and research at the FSA.
He said: “Product risks can be much greater on UCIS and similar products than on more mainstream investments and we have found the majority of retail promotions and sales fall a long way short of our existing standards.”
Anyone sold UCIS or similar products should look over the details again to ensure they understand the risks they’re taking, said O’Neill at Carbon.
Yet the FSA’s actions may make it even harder for worried investors to take their money out of UCIS investments.
“The unfortunate thing is that some of these products may not offer easy access to capital,” said O’Neill. “Even for those that do, my fear is that investors might head in droves for the door marked ‘exit’, sparking a repeat of the mass redemption requests that followed the FSA’s pronouncement that life settlement funds were ‘toxic’.”
Such a flight to safety could eventually mean that some UCIS are unable to meet all redemption requests, leaving investors unable to access their money.
There also remains a threat of pension savers being tempted into unsuitable UCIS before the ban comes into force.
As it stands, UCIS can be promoted to ordinary savers and investors, provided an adviser first ensures the product is suitable for them.
Thomson said: “UCIS have generally been marketed to holders of self-invested personal pensions since holders tend to be higher net worth and/or financially sophisticated and in any event, longer-term large pension assets lend themselves to the longer-term and relatively illiquid nature of UCIS.”
O’Neill believes the risk of unsuitable recommendations is particularly high over the coming months, before new rules come into force in January banning providers from paying commission on product sales by advisers.
He said: “One feature that is common across the products I’ve seen and discounted is the ridiculously high up-front commission available to advisers.
“Some advisers, and it should be stressed that it is definitely the tiny minority, have clearly not had their clients’ best interests in mind when recommending UCIS products.
“The commission ban in the forthcoming Retail Distribution Review is long overdue.”
The FSA has stressed that not all existing UCIS have been mis-sold. It suggested that anyone unsure about an asset or scheme in which they are invested should ask a financial adviser to explain how they investment works and examine whether it is still right for them.
“If customers believe they were mis-sold a product they should contact the firm that arranged it for them and raise their concerns,” said the FSA’s Stewart. The firm should have a procedure to follow to resolve matters.
But if you’re unhappy with the firm’s response or its proposed resolution, or if you believe you have been a victim of mis-selling, you can complain to the Financial Ombudsman Service (visit www.financial-ombudsman.org.uk or call 0800 023 4567).