The FSA is urging IFAs to carry out an urgent review of any advice they have given on unregulated collective investment schemes (UCIS) and make redress to customers if needed.
Its warning comes after a review of advice on UCIS found serious failings among firms, including in extreme cases pushing clients to re-mortgage their homes for extra cash to invest in the schemes.
Some firms also did not set a limit on how much of a client's portfolio could be in UCISs, resulting in advisers recommending up to 100% of portfolios to be invested in the schemes.
Six firms that have been promoting and recommending UCIS to customers are currently being investigated by the FSA's Enforcement and Financial Crime Division.
The regulator is also discussing a number of other firms with the Enforcement division while other firms investigated will take internal action to remedy failings in this area.
Linda Woodall, FSA director of the small firms and contacts division at the FSA, says:
"There are a number of fundamental problems including some advisers selling things they don't understand but by doing so they are putting their professional reputation at risk.
"Some have fallen foul more wittingly by wrongly classifying clients in the high net worth category so they can promote these schemes, which is not acceptable.
"There is also confusion about how advisers classify ‘promotion' of these schemes. Some advisers think this means sending out a leaflet or advert but it also includes the advice process."
She says advisers can be bombarded by information from groups to market these schemes which look "very tempting" but many do not understand the risks involved.
UCIS cannot be promoted to the general public but advisers are allowed to recommend the schemes to certain high net worth or sophisticated investors.
SIPPs were found to be the most widely used wrapper for UCIS investments, mainly because they were often the only vehicle IFAs could use to invest in the schemes, even when neither the SIPP not the UCIS were suitable for the customer's risk profile and objectives.
In 44% of the UCIS files reviewed, the FSA found firms recommended customers to invest or transfer their existing pension arrangements into SIPPs as these were the only vehicle for investing in some UCIS.
Teak farms in central America, Mexican golf courses, property in the Balkans and country clubs are among the investments some savers are holding as part of their pension.
Poor quality advice and poor risk management procedures resulted in some IFAs failing to check whether customers were even eligible to be sold UCIS in the first place, the FSA says.
Its review found 74% of cases showed unsuitable promotions to consumers.
In 52% of cases the suitability of advice was unclear, and in 22% it was actually unsuitable
The FSA investigation found 64%, nine out of the 14 firms it interviewed, did not have a clear understanding of what constitutes a financial promotion.
These firms failed to consider verbal communications such as face-to-face discussions and phone calls about a particular UCIS or written communications such as emails regarding a particular UCIS, as financial promotions.
Nor did they believe it was a financial promotion to introduce a particular UCIS during a recommendation to invest customer's money into that UCIS as part of the firm's sales process.
The FSA says it was also "disappointed" to see that some compliance consultancy firms were also unaware of the regulatory requirements surrounding UCIS and it would be focusing on this area through extra educational support.
It has issued a factsheet on UCIS to help advisers.
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