FCA to limit promotion of unregulated collective investment schemes and close substitutes

As expected, the FCA is to prohibit promotion of unregulated collective investment schemes ("UCIS") and securities issued by certain special purpose vehicles ("SPVs") to "ordinary" retail investors, with effect from 1 January 2014. Under the current rules, firms may promote UCIS to retail customers if they are promoted in the context of an advisory relationship, and the investment adviser deems a product suitable in accordance with the rules on suitability in the FCA’s conduct of business rules ("COBS"). Securities issued by SPVs, on the other hand, are not currently subject to the marketing restrictions which apply to a UCIS.

This policy change is made is to address FCA concerns that UCIS and similar investments are able to invest in an unlimited range of assets and projects where risks are often high and underlying assets frequently illiquid or highly speculative. There has been significant enforcement action in this area. While this policy change is as expected, some new issues are highlighted in FCA Policy Statement 13/3, which announced the change:

  • The FCA is planning to undertake a consultation on proposals to confine the promotion of loss-absorbing capital instruments issued by banks and building societies to professional investors and only those retail investors who are sophisticated or high net worth. Such instruments can be expected to include contingent capital securities ("cocos") but, as there is no definition of "loss-absorbing capital" in FCA PS13/3, the potential application of any proposals to other forms of bank and building society capital, as well as hybrid securities issued by other types of issuer (e.g. insurance companies), is unclear.
  • As the thresholds in the exemptions which permit promotion to "high net worth" investors were set in 2001 (at an annual income of more than £100,000 or investable net assets of more than £250,000), the FCA will consult on whether these remain appropriate or should be set at a higher level.
  • The FCA may use its new wide ranging power of product intervention, as a temporary measure, to stop promotion of other complex and higher-risk investment products to "ordinary" retail investors, until rule changes to effect such a ban can be made.

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