Unregulated Collective Investment Schemes (UCIS) and their near cousins, non-mainstream pooled investments (NMPI), remain a source of concern to the Financial Conduct Authority (FCA) and there are a plethora of rules about how they must be marketed and operated on a day to day basis. Improper operation and unlawful marketing can lead to disciplinary or other action from the FCA, and open up scheme promoters to civil claims from investors. Where intermediaries have advised clients on investment in such schemes, potential mis-selling claims can arise if a proper appreciation of risk has not been undertaken in light of the client’s appetite and the suitability of the investment as part of the client’s overall portfolio.
What is an unregulated collective investment scheme (UCIS)?
A UCIS is an arrangement where two or more individuals pool their money or other assets together and cease to have day to day control over the pooled assets. Common types of UCIS are limited partnerships, certain limited liability partnerships and unit trusts. Any vehicle which is an authorised unit trust, an authorised OEIC or which is a UCITS scheme will not be an unregulated collective scheme.
What to consider before making a UCIS offer
In addition to the restrictions on marketing UCIS, set out below there are three points which should be considered long before making an offer of participations in a UCIS.
- The Prospectus Regime
UCIS are subject to the normal laws relating to prospectuses where participations are transferable. This means that unless an offer falls within any exemption against the need for a prospectus, a formal prospectus approved by the FCA and prepared in accordance with the Prospectus Regime must be published. This can be a very expensive and time consuming process. Exemptions against the need for a formal prospectus may be used to streamline the process.
- The Financial Promotion Regime
If no formal prospectus is required then the offer falls into the financial promotion regime (as well as a series of other restrictions set out below), this being governed by section 21 of the Financial Services and Markets Act 2000 (FSMA). This states that any invitation or inducement to engage in investment activity can only be made by an authorised person, via a communication approved by authorised persons or if one of the exemptions in the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005 (FPO) applies.
- Scheme Promotion Restriction
Authorised persons are subject to the scheme promotion restriction in section 238 FSMA. This states that an authorised person may not issue an invitation or inducement to any person to participate in an unregulated collective investment scheme unless exemptions apply. The rationale being that the seal of approval from an authorised person provides the product with added credence, and history shows that this is not always merited. Exemptions to the scheme promotion restriction may be utilised.
Is a UCIS a problem?
Provided that a UCIS is correctly identified as such then the schemes are not necessarily a problem, but the regulatory demands are higher than other types of investment which can give rise to greater expense. For example, an operator authorised by the FCA must be appointed to establish, operate and wind up collective investment schemes.
UCISs are generally recognised as toxic products and are often used to house high risk investments. Unless an investor has an appetite for high risk investments or is seeking to undertake a particular tax planning strategy and, in each case, can realistically bear the loss of the entire investment, it’s unlikely that a UCIS would be advised as a suitable investment for all but the hardy few.
What is a Non-Mainstream Pooled Investment?
An NMPI is a security issued by an investment vehicle which looks very much like a collective investment scheme, but because of a specific exemption it technically does not fall within the definition of a collective investment scheme. For example, a limited company cannot be a collective investment scheme, but many UCIS type schemes have been set up as limited companies to bypass the rules on day to day operations of a UCIS (eg appointment of an operator) or the restriction on marketing of UCIS.
COBS 4.12 of the FCA Handbook now centres on NMPI rather than UCIS as it used to. Where there is an NMPI the restrictions on marketing apply to securities issued by an NMPI as they do for a UCIS.
Authorised persons should be aware of the existence of NMPIs and the restrictions on marketing. We would expect the FCA spotlight on them in the future.
The Non-Readily Realisable Security Offers
This is a new regime (as of 1 April 2014) inception driven by the FCA’s attempt to open up the crowd funding regime within the regulatory environment. This applies not only to UCIS and NMPI more generally, but a wider variety of securities.
An NRRS is an investment which is either an NMPI or which is not admitted on the official list of any EEA state or regularly traded on particular markets. Note that not all markets in the UK qualify as “readily realisable” platforms. NRRS's may only be marketed to professional clients, retail clients who are high net worth individuals or investors or sophisticated investors, or investors who certify as restricted investors, namely a person who has not invested more than 10 per cent. of their net worth in NRRSs in the 12 months prior to the investment.
An authorised person promoting an offer of participations in an unregulated collective scheme needs to be mindful of and deal with:
- The Prospectus Regime
- The financial promotion restriction in section 21 FSMA and COBS 4
- The scheme promotion restriction in section 238 FSMA
- The requirements of the PCISE Order and COBS 4.12
- The requirements of COBS 4.7 in relation to NRRS
- The need to appoint an operator authorised under FSMA
An unauthorised person also needs to consider the Prospectus Rules and section 21 of FSMA.
This is a complex area of law. Advice should always be taken. A UCIS can be not just a UCIS but an NMPI and NRRS at the same time!
If you have any questions or would like more information please contact Richard Tall, Partner, Corporate.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.