Amid a push for more intrusive regulation, the UK Financial Services Authority (FSA) is proposing to ban the promotion of alternative investment products that have often proven unsuitable for retail investors.

The FSA Wednesday published proposals that would ban the promotion of Unregulated Collective Investment Schemes (UCIS) and similar products to the vast majority of retail investors. Currently, these products, which don’t follow the same rules as ordinary investment funds, allow their managers more flexibility to invest in unusual assets or to follow unorthodox investment strategies, and they can be promoted to retail investors if an advisor first assesses the product’s suitability. But the FSA is now proposing to put a stop to that, even in the context of financial advice.

The consultation paper proposing the move comes after the FSA found a high frequency of suitability problems with these products. It says it found that only 25% of advised sales of UCIS to retail customers were actually suitable, including instances of retirees being advised to invest all of their wealth in a single, illiquid UCIS with a view to generating income; and, customers advised to borrow money to invest in UCIS and service the debt with withdrawals from the investment.

A number of these non-mainstream pooled investments have failed completely in recent years, leading to total investment loss for customers, it notes.

The proposed rules mean that, in the retail market, UCIS promotions will generally be restricted to sophisticated investors and high net worth individuals. And, it is also proposing new rules for other products that can carry similar risks to UCIS, but are subject to even fewer marketing restrictions — special purpose vehicles (SPVs), which the FSA has found are being used to pool investment assets traditionally found within UCIS — the FSA proposes to introduce new rules for them to create a level playing field and improve standards of consumer protection.

The FSA estimates that the UCIS retail market is worth around £2.5 billion in the UK, and that 85,000 ordinary retail investors have exposure to these investments, which can hold alternative assets such as traded life policy investments, wine, crops and timber. Another £1.5 billion is invested in SPVs, which can carry similar risks for investors.

“Product risks can be much greater on UCIS and similar products than on more mainstream investments and we have found that the majority of retail promotions and sales fall a long way short of our existing standards,” said Gavin Stewart, acting director of policy, risk and research at the FSA. “This is important because it is exposing ordinary investors, for most of whom these products are clearly unsuitable, to significant potential for large losses on what are often esoteric and illiquid investments. This situation needs to change and so we are acting now to prevent these products being marketed to ordinary retail investors in the future.”

This is the second instance of the FSA deciding that certain products are simply unsuitable for sale to retail investors. Earlier this year, it published guidance strongly recommending that traded life policy investments should not reach the vast majority of retail investors too.

Comments on the consultation are due by November 14.