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The FSA's Approach to Promoting & Advising on Unregulated Collective Investment Schemes, Contributed by Adrian Brown and Sam Robinson, Nabarro LLP

Monday, October 17, 2011

With its increased focus on enforcement, the Financial Services Authority (FSA) has recently taken action against a number of firms for breaching the rules and legislation relating to promoting and advising on unregulated collective investment schemes (UCIS). This article outlines the approach being taken by the FSA in this respect and considers what lessons may be learnt from the FSA's actions.

Summary of the Regulatory Position of UCIS

A collective investment scheme is, generally speaking, a pooled investment vehicle that invests on behalf of its participants and is managed by someone on their behalf (e.g., a fund that invests in FTSE 100 securities that is managed by a professional fund manager). In the UK, there is the concept of "regulated" collective investment schemes and UCIS. Regulated collective investment schemes generally have restrictions placed on their investment powers etc. and can be promoted to the public generally (provided certain requirements are satisfied). UCIS, on the other hand, as they are unregulated do not have any such restrictions placed upon them and can only be promoted in certain specific circumstances outlined in the FSA rules and the relevant legislation (and not to the public generally). Although collective investment schemes themselves are referred to as being regulated or unregulated, any person that carries on regulated activities in the UK in relation to either of them is required to be authorised by the FSA (or fall within an exclusion or exemption). In other words, any person that arranges the sale of UCIS would need to be FSA authorised. Generally speaking, the distinction between regulated and unregulated is relevant in relation to the promotion of the relevant scheme, not whether a person is carrying on a regulated activity.

Background to the FSA's Approach to UCIS

While undertaking a "Treating Customers Fairly" assessment in 2009, the FSA identified issues relating to the sale of UCIS by small firms.1 As a result, the FSA conducted a project with the main focus being "the eligibility of customers and the quality of advice given in promoting and recommending a UCIS as an investment." Following this project, the FSA found that firms "were unaware of the statutory restrictions on the promotion of UCIS to the general public. Therefore, they may have promoted UCIS where this is prohibited." As a result, the FSA referred a number of potential breaches to its enforcement and financial crime division for further action.

Recent FSA Enforcement Action

The FSA has recently taken enforcement action against a number of firms and individuals in relation to promoting and advising on UCIS.2 In the majority of cases, the penalties that have been imposed on the individuals concerned have included:
  • Withdrawing their approval to carry on certain controlled functions;
  • Prohibiting them from carrying on a significant influence function and/or a customer function (either indefinitely or for a certain period);
  • Prohibiting them from communicating (or causing any FSA authorised person to communicate) an invitation or inducement to participate in a UCIS; and
  • Imposing a fine ranging from

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