John Elliott, senior case officer at Rebus Investment Solutions, explains the specific issues confronted by people who hold assets in unregulated collective investment schemes.

John Elliott, senior case officer at Rebus Investment Solutions, investor champions for those who have been mis-sold complex investment schemes, writes about the specific issues confronted by people who hold assets in unregulated collective investment schemes. UCIS cannot be promoted to retail investors in the UK. What should investors who find themselves potentially “trapped” in UCIS vehicles do? The editors are grateful to the author for sharing these insights, although we do not necessarily endorse all the opinions in such articles, and invite readers to comment.

Last month, the UK Financial Conduct Authority banned the promotion of unregulated collective investment schemes. These unregulated schemes invest in niche products, such as wine, carbon credits and films, and often bring significant tax benefits (often referred to in the media as tax avoidance schemes, although in reality they are “tax deferment” schemes).

It is not always going to be readily evident that you have invested in a UCIS product - they are not transparent or straightforward, and often have a long line of parties involved in managing, consulting on and promoting a scheme.  Highly risky in nature, most of the time investors are not made fully aware of the risks involved.   

How do I know if I have invested in a UCIS?

UCIS are not subject to the same restrictions as other investment vehicles, and even though a scheme is not authorised, advising on, operating or managing the schemes is still a regulated activity.  The guidelines for advisors to adhere to in order to recommend these products are strict, yet some of these have not been followed and people that shouldn’t have been recommended UCIS have been.

Under the new rules proposed by the FCA, “sophisticated” investors and high net worth individuals are the only people eligible for these products. These are people with extensive knowledge and experience of investing; or someone who earns over £100,000 ($151,521); or who has £250,000 in investable cash.  It is worth asking your advisor if you have any UCIS within your portfolio, or whether you have ever been previously exposed to them.  There may be repercussions further down the line from a tax perspective from previous exposure to UCIS

Investors in UCIS products should be concerned about what proportion of their portfolio is invested, and what the underlying assets of the investment are.  If the overall percentage invested in UCIS is very small, it may not be an issue.  But because they are very risky products – often illiquid products which can be difficult to value or sell – investors may not have access to protection from the Financial Ombudsman Service, or the Financial Services Compensation Scheme.

What to do?

Ask your advisor to explain, in detail, what investments you hold and how they are designed to meet their investment objectives.  Advisors are meant to be able to explain the level and degree of risk associated with investments and detail why the investment is suitable.  Be wary and cautious of those advisors who are not able to readily articulate, jargon-free, the details and risk that holding this type of product will have on your portfolio and overall investment objective. 

If you are not happy with the level of risk you are exposed to, find out what the implications would be to rearrange your portfolio to better reflect your investing requirements. 

What next?

The FCA is not introducing this ban until January 1st next year. If these schemes are so high risk that they need to be dealt with, why is the FCA waiting until next year?  This all, evidently, still leaves a significant group of investors at risk - regardless of whether you are a HNW individual or a sophisticated investor, it is more than likely you will get stung if invested.

The big issue with UCIS is not necessarily who they are sold to, but how they are sold. In fact, the regulator’s own analysis came to this very conclusion – 85 per cent of firms surveyed by the Financial Services Authority (the old regulator) last year demonstrated a wide range of poor practices; some 78 per cent of firms breached regulatory requirements when promoting unregulated investments; 96 per cent of cases demonstrated non-compliance with Financial Promotion rules – yet this ban completely misses that point.

The UCIS scandal has been allowed to continue for far too long: for over 10 years the FSA failed to monitor the selling of UCIS and, as a result, there is little or no understanding of the extent to which these products were sold (and, in many cases, mis-sold).  In my view, this is another example of the “regulation without teeth” that fuelled the problem in the first instance.