What did your investment adviser tell you about the risk involved? 

Risky investment schemes continue to generate distressing news, not only because investors have lost substantial sums, but also because the volume of complaints of mis-selling against professional advisers is growing.  In many cases unsuitable investments have been made without due warnings being given about the higher risks of unregulated investments.

What is a CIS? … and what is a UCIS?

A collective investment scheme (CIS) is a fund that several people contribute to, sometimes referred to as ‘pooled investment’. A fund manager will invest the pooled money in one or more types of asset, such as stocks, bonds or property.

There are many types of CIS that are regulated by the Financial Conduct Authority (FCA), but if the FCA has not authorised or recognised a collective investment scheme then it will be classified as a UCIS. A UCIS may be established, operated and/or managed in the UK or in a jurisdiction outside the UK. But they are not subject to the same restrictions as CIS in terms of their investment powers and how they are operated.

Typically, UCIS involve  ‘exotic’ investment opportunities such as overseas property, forests and plantations e.g. Jatropha trees in Cambodia, diamonds, fine wine, storage pods and car parks, or renewable energy. Faced with low returns from conventional savings, the high returns promised by UCIS are naturally appealing.

But these schemes are not subject to the same controls and as such are riskier.  They are also often difficult to cash in because the underlying investments are in assets that are not easy to sell at short notice.

Regulation of UCIS

In January 2014 the Financial Conduct Authority introduced strict guidelines for advisers to follow when promoting UCIS. This was done to reduce the likelihood that UCIS would be sold to “ordinary retail” consumers. UCIS can now only be recommended to ‘sophisticated’ and ‘high net worth’ investors.

Sophisticated investors are defined as those that have extensive knowledge and experience of investing, and high net worth investors are defined as those with an income of more than £100,000 or having assets of more than £250,000 (excluding their property).

The rule changes introduced by the FCA in 2014 brought many investors to review their existing arrangements - and to query the investment advice they had received at the outset. Such queries continue to arise.

Should I have been recommended a UCIS?

If you have already been sold a UCIS, consider whether you were correctly certified by your investment adviser as falling into an eligible investor group for a UCIS. For example, if you have sufficient assets as per the guidelines, but you asked your adviser to invest your life savings in a cautious way, not even considering the stock market because you consider it too risky, then you were/are probably not the right candidate to be certified as suitable for a UCIS.

You should, secondly, consider what proportion of your portfolio is invested in UCIS, and what the underlying assets are. If the overall percentage invested in UCIS is very small, it may not present any issues. Not all UCIS are bad, and some have performed very well.

Like any investment, it is crucial that your adviser understood the way the fund works, what the ultimate underlying investment is and the potential risks involved, and explained those details fully to you.

If your money was invested into a UCIS on the advice of a financial adviser, but that advice was wrong, you may be able to make a professional negligence claim against the adviser.  You may also have other options at the Financial Services Compensation Scheme or the Financial Ombudsman since the advice to invest is likely to have been regulated, even if the underlying investment scheme is not.

Re-mortgages

Some complaints about UCIS have been linked to inadequate advice on affordability when a client re-mortgages. In one scenario, a lady re-mortgaged her home to invest in a speculative property development in Spain. The property investment fell through and the investment advisor went out of business. The lady approached the FSCS for compensation since she remained saddled with the mortgage loan.

As the Spanish property investment was a UCIS, the regulator had refused to pay compensation for the capital lost and was only offering compensation for the consequent higher mortgage payments. The Court of Appeal considered that the investment should be viewed as a whole, to include the re-mortgage that facilitated it. Given that the advice to take out the interest-only mortgage failed to consider properly the borrower’s ability to re-pay, and given the risks associated with the Spanish property investment, the whole transaction was the result of negligent advice.

The court applied the principle that the claimant should be returned to the position she would have been in had she not received bad advice and decided the lady should recover her full loss, including the capital loss on the Spanish property. This same principle would apply in a court claim for professional negligence against an investment advisor.

SIPPs

Often UCIS are wrapped up in self-invested personal pensions (SIPPs). SIPPs have been used by some advisers as wrappers for exotic, risky and potentially poor value unregulated products such as UCIS.

Summary

UCIS are, by their very nature, risky products and because they are not regulated, you may not have access to any protection afforded by the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if they fail; unless you were badly advised by a regulated adviser.

About the author

Susan Hopcraft Partner

Susan advises on all aspects dispute resolution particularly in the financial services sector. She has extensive insurance, professional negligence and restrictive covenants experience. She deals with claims against solicitors, valuers, surveyors, brokers and accountants, fraud issues, recoveries for lenders and bank mis-selling.