What you need to know about Unregulated Collective Investment Schemes
What is an unregulated collective investment scheme?
A collective investment scheme (CIS) is sometimes referred to as a “pooled investment”, where a number of investors collectively pool their assets into a fund with a view to sharing in the profits or income from the purchase, holding, management or disposal of the assets or sums paid out of such profits or income. Its legal definition can be found at s.235(1) of the Financial Services and Markets Act 2000 (FSMA).
A CIS may be regulated or unregulated. This is typically where the problem of mis-selling can arise.
There are various rules surrounding what amounts to a regulated CIS but, effectively, such a scheme is regulated if it is authorised or recognised by the Financial Conduct Authority (FCA). An unregulated collective investment scheme (UCIS) is simply one which does not fall within the defined categories of a regulated scheme. This is normally because the scheme does not comply with the strict borrowing and investment criteria of regulated schemes set by the FCA.
The underlying assets sometimes held within an investment portfolio of a UCIS can include fine wines, crops, forest plantations, renewable energy, film production, foreign property and other “speculative” financial instruments. Whilst on face value these may appear to offer higher returns with less volatility than more usual and common investment types, they often operate with higher risks. Typically, a UCIS also tends to be pooled into a single asset, which means that if that asset fails everyone will lose their investment rather than spreading the risk across a range of assets.
When returns on conventional savings remain at an all time low, the high returns promised by complex, exotic and untraditional investment schemes may sound particularly appealing to investors. You should however ensure that you are fully aware of the risks involved which such schemes.
Since January 2014, the FCA has imposed restrictions on the promotion of UCIS due to the degree of risk that they carry. UCIS’s can now only be promoted to:
- Certified high net-worth individuals (Article 21 of FSMA)
- Sophisticated investors (Article 23 of FSMA)
- Self-certified sophisticated investors (Article 23A of FSMA)
How do I know whether a CIS is authorised and/or recognised?
You can check the FCA Register to find out whether a CIS is authorised or recognised – click on the “Advanced search” link to search collective investment schemes.
What precautions can I take?
Even if a scheme is not authorised or recognised, persons carrying on regulated activities in the UK in relation to UCIS investments – including providing personal recommendations, arranging deals and establishing, operating and managing schemes – are still subject to the FCA’s regulation.
Before you agree to invest in a UCIS, your adviser should confirm:
- That they are permitted to promote the scheme to you and set out why it is suitable for your circumstances.
- Which investor category applies to you, if you are not sure whether you fall into any of the investor categories that can have a UCIS promoted to them (see above). If you have already been sold a UCIS, you can still ask the firm what investor category you fall into.
- Make sure you read all available information and ensure you understand and accept the risk that you may lose some or all of your investment. Your adviser should clearly explain the nature of the underlying investment and risk to you.
- What charges there are, what the rate of return is and whether this is actual or targeted.
- Perhaps most importantly, whether you may have access to the Financial Ombudsman Service and Financial Services Compensation Scheme if things go wrong, and seek independent professional advice if you are in any doubt about the potential risk and returns involved.
What can I do if I have been advised to invest into a UCIS?
If you believe that a firm has promoted or sold you a UCIS that is not suitable for you, sold a UCIS to you unlawfully or without fully explaining the risks, please contact us.
We can assist you in assessing the merits of your claim and advise on the most appropriate avenue for you pursuing compensation.
We have an experienced and specialist Banking and Finance Litigation team which has successfully recovered over £40m in compensation in relation to mis-sold financial products for our clients to date.
If you feel that you may have been mis-sold an UCIS, contact Luke Baldwin, a lawyer of the Banking and Finance Litigation Department, at firstname.lastname@example.org or on 01202 525333.