Nick McLean, partner at Paxton Private Finance, on the FSA's proposed changes to UCIS promotions and what they mean for advisers
Changes outlined in the Financial Services Authority (FSA) consultation on reforming the promotion of unregulated collective investment schemes (UCIS) further restrict the sale of UCIS funds to ordinary investors.
As a result, there are a number of important implications for financial advisers.
To adhere and adapt to the proposed changes, it is fundamental that advisers have a clear understanding of what they entail, how they affect their existing clients and the effect it will have upon marketing to prospective clients. For example, the profile of investors that are eligible.
Four due diligence steps advisers must take
In addition, and perhaps most importantly, they need to understand the measures that can be taken to adjust the way in which fund advice is provided.
>>Click through to page 2 to see the four due diligence steps<<
One of the primary reasons why UCIS products have been subject to increasing scrutiny and examination is that they are investment vehicles offering diverse assets, not subject to a strict set of rules and reporting requirements enforced by the FSA.
By definition, this also opens these funds up to greater risk, volatility and liquidity issues.
However, contrary to some of the more negative commentary, there is nothing inherently wrong with UCIS as a structure. You only have to look to the FSA’s good practice guidance notes for examples of their benefits.
However, due to the nature of these funds, the primary responsibility of carrying out due diligence and ensuring the various FSA changes are made and enforced must lie with financial advisers.
What are the proposed reforms?
The recent reforms proposed by the FSA are intended to prevent the sale of UCIS funds except to those investors who understand and have financial resources suitable to invest in a possibly illiquid scheme, or one whose investment strategy is inherently higher risk.
This has, therefore, meant the promotion, marketing and sale of UCIS funds is exclusive to high-net-worth (HNW) and sophisticated investors through their advisers.
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