FCA bans the promotion of UCIS and close substitutes to ordinary retail investors

The new rules follow an FSA consultation last August on retail promotions and sales of UCIS, which found that these were often inappropriate and failed to meet existing requirements, exposing ordinary retail investors to significant potential for detriment.

Under the new rules, promotions of UCIS and other NMPIs in the retail market will generally be restricted to sophisticated investors and high net worth individuals (generally retail clients with an annual income of more than £100,000 or investable net assets of more than £250,000), for whom the FCA considers these products are more likely to be suitable. The rules will take effect from 1 January 2014 but FCA suggests that firms may wish to comply with them sooner, in order to avoid the risk of inappropriate or unsuitable sales to ordinary retail investors.

Units in UCIS, units in qualified investor schemes (“QIS”), traded life policy investments and securities issued by SPVs that pool investment in assets other than listed or unlisted shares or bonds are all covered by the new restrictions. The restrictions will not however apply to exchange traded products, overseas investment companies that would meet the criteria for investment trust status if based in the UK, real estate investment trusts, venture capital trusts, enterprise investment scheme funds and seed enterprise investment scheme funds that are not structured as UCIS or securities issued by SPVs that pool investment in listed or unlisted shares and bonds. Firms are still required to ensure that promotional communications about these products are fair, clear and not misleading and that, if advice is given, any recommendation to invest is suitable for the client.

The FCA considers that, in relation to alternative investment funds, the new rules are consistent with the AIFMD. Under the AIFMD, national regulators have the option of allowing the promotion of alternative investment funds to retail clients, subject to ‘stricter requirements’ determined by the national regulator (Article 43).

The FCA will continue to review market developments and may potentially extend the scope of the marketing restrictions to cover more pooled investments, in particular if it considers firms are creating arbitrage opportunities in order to bypass the restrictions. The FCA also intends to consult on a new marketing restriction in relation to a range of novel securities which are starting to be introduced to the retail market, including contingent convertibles (CoCos), building society deferred shares and similar instruments previously only offered to institutional investors. The FCA considers that the risks of these products are unfamiliar to and inappropriate for many ordinary retail investors.

The final rules and feedback to the FSA’s consultation may be found in the FCA policy statement, PS13/3, which is available here.

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