Following through on its promise to be more proactive in ensuring investor protection, British financial regulators have decided to ban the sale of certain esoteric investment funds to ordinary retail investors.
The Financial Conduct Authority (FCA) published final rules Tuesday that would ban the promotion of so-called non-mainstream pooled investments (NMPIs), including unregulated collective investment schemes (UCIS) and certain close substitutes, to the vast majority of retail investors in the United Kingdom.
Under the new rules, these riskier, often-complex fund structures will generally be restricted to sophisticated investors and high net worth individuals.
The FCA says that these sorts of funds often invest in more obscure assets such as wines, crops, timber, and speculative financial instruments and traded life policies, which may make them particularly illiquid, difficult to value, and volatile.
Governance controls can also be weaker than on more mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors, it notes.
The regulator says that the ban follows extensive work undertaken by its predecessor, the Financial Services Authority (FSA), which found that sales of these products often didn’t comply with its rules — only 25% of advised sales of these products to retail customers was suitable, it notes; and, many promotions breached the existing marketing restrictions for these funds.
Moreover, a number of these products have failed completely in recent years, leading to customers losing all of their investment.
“Consumers have lost substantial amounts of money investing in UCIS and similar products in recent years so the need to introduce new rules to prevent this from continuing was essential,” said Christopher Woolard, director of policy risk & research at the FCA.
“We believe today’s rules strike the right balance. They should go a long way in helping to protect the majority of retail investors in the UK from inappropriate promotions while allowing the industry to market these risky, unusual or complex investment propositions to those experienced investors for whom they could be suitable options.”
The FCA reports that it is also monitoring novel products which are not pooled investments that are now being introduced to the retail market, not just to institutional investors, that also “carry risks unfamiliar to and inappropriate for many ordinary retail investors”. It says it intends to consult on the introduction of a new marketing restriction in relation to these types of products, too.