7th December 2010

Resources Compliance - Unregulated collective investment schemes "UCIS" - update

We first issued a Compliance Tip on the subject of UCIS in November 2009, outlining some timely reminders about dealing with UCIS transactions. Since that time FSA have continued with their themed work in this area and produced a number of documents and website material.

The key findings of FSA were 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 and consequently arranged UCIS for customers for whom they may not be suitable.

There is a general prohibition on marketing UCIS to Retail Clients but this is avoided where exemptions may be claimed under either of:

• The Promotion of Collective Investment Schemes (Exemptions) Order 2001 (SI 2001/1060) (as amended) - the "PCIS Order"; and/or
• The FSA Handbook in the table at COBS 4.12

Common exemptions under the PCIS Order include those for certified high net worth individuals, certified sophisticated investors and self-certified sophisticated investors. These each require a combination of certification documentation, provision of warnings and certain indications in order to be valid.

The table at COBS 4.12 provides eight exemption categories. We have found that the two most common categories likely to be used by firms are:

• Category 2 person - paraphrased as 'suitability'; and
• Category 8 person - paraphrased as 'competent investor'

It is perhaps important to distinguish between these two. The Category 2 exemption may apply where the firm has taken reasonable steps to ensure that investment in the UCIS is suitable for the client. However, it can only apply to that particular UCIS being transacted and so must be repeated each time a different UCIS is considered.

Category 8 exemption may apply where 'the firm has undertaken an adequate assessment of...a client's...expertise, experience and knowledge and that assessment gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the person is capable of making his own investment decisions and understanding the risks involved'. There are some documentary warnings to be given which the client must separately acknowledge in writing but once done, this exemption can apply to any UCIS covered by the assessment. It is therefore a method by which clients may be 'pre-vetted' in order to then receive a number of UCIS promotions thereafter.

Key Action Point

Firms need to consider what methods they may utilise in order to be able to compliantly promote UCIS to their clients. We would suggest that a Category 8 pre-vetting exercise may allow firms to identify most of their potential UCIS customers and then Category 2 exemption could be used to pick up any remaining customers not so included at first.

Whichever exemption is used, firms must ensure that the one claimed is adequately documented and can be suitably demonstrated if challenged by FSA. We can assist firms with templates to be used for the classification of exemptions for UCIS business and also carry out independent reviews relating to UCIS matters. For Resources retainer firms these templates are available on request.

Help

If this is an area you would like assistance with, or indeed if you have any queries on this subject please contact your usual Consultant or the Resources Compliance London office on 020 7422 7780.

Investments