The UK’s financial watchdog has announced advisors recommending clients invest in unregulated collective investment schemes (UCIS) for their self-invested personal pension (SIPP) may face an investigation.
The Financial Services Authority (FSA) says there is a growing issue because many clients are losing large sums – in some cases all of their pension pot – because they didn’t realise that UCIS investments are not regulated.
Unregulated means they are outside the scope of the FSA’s reach and investors cannot use the Financial Services Compensation Scheme or the Financial Ombudsman Service to claim redress if something goes wrong.
The FSA has confirmed it is looking at taking enforcement action against some firms – especially those who persuaded investors with SIPPs to take on risky UCIS investments.
There are 85,000 people with around £2.5 billion invested in the UCIS market and they have invested in a wide range of assets within their SIPP but many of the schemes do not have enough liquidity within them should someone want their money back.
Unfair protest
Firms cannot promote UCIS to the general public and so have to use independent financial advisors to distribute their products who should only disclose them to experienced investors.
However, one aspect of the investigation has caused alarm because it will also cover the selling of real estate investment trusts (REITs) because they also fall under the umbrella of being unregulated collective investment schemes.
A spokesman for the Association of Investment Companies (AIC) says the FSA’s move doesn’t ‘make any sense’ and would not be fair.
He said: “The approach by the FSA is opaque and we believe that any fund which holds investment not considered as liquid or mainstream will be caught out by the ban.”
The FSA has confirmed that some REITs will be banned even though they were created by the government in 2007 and bring tax advantages if they distribute 90% of their income to shareholders.
Risky REITS
However, one financial services firm, Hargreaves Lansdown says that many investors do not realise how risky a REITs investment can be – even if they focus on stock exchange listed property firms.
A spokesman said: “Because many REITS use borrowing to build their portfolio they increase potential returns but increase the risk too, particularly when those borrowing costs rise.”
Another issue for the proposed ban on UCIS investments is that analysts say that Enterprise Investment Schemes and Venture Capital Trust (VCT) schemes could also be affected.
The AIC believes that investment in these schemes will halve in the next financial year and that they should be granted an exemption.
The AIC spokesman said: “The FSA didn’t mention VCTs by name but the proposed ban on UCIS products will have a huge impact on this sector.”
