The Financial Services Authority (FSA) has warned that unregulated collective investment schemes (Ucis) are using aggressive sales techniques to lure advisers into selling risky products.
The regulator says the number of Ucis is on the rise and they are increasingly offering high commission levels and inducements such as trips abroad.
The schemes offer exotic investments such as country clubs and golf courses in Mexico or film production companies in foreign countries.
Linda Woodall, the acting director of small firms and contacts division at the FSA, says: “The problem is we have seen instances of clubs and consortiums popping up. The objective is to woo IFAs and encourage them strongly to promote schemes to customers.”
Ucis are not regulated, but Woodall warns IFAs that advice concerning the schemes is regulated and advisers could face FSA action if they promote Ucis to clients. The regulator says it is actively searching through the sector to find IFAs that have “dabbled in products they do not understand”.
The FSA has told 11 firms to stop promoting the products and the firms have agreed to accept reduced regulatory permissions. Four of those are having to appoint skilled persons to review their quality of advice, which could see them pay damages to clients.
The FSA’s enforcement division remains in discussions with three of these four firms over potential further action concerning their promotion of Ucis.
Woodall says: “If inappropriate advice is being given, even though it is all very tempting potentially, the risk to advisers’ professional reputation means I just do not think it is worth it. (article continues below)
“You can lose everything you invested and, because they are unregulated, you cannot have recourse from the ombudsman or the Financial Services Compensation Scheme.”
FSA research reveals that in 52% of the Ucis cases it found, the suitability of the advice provided by IFAs was unclear. In 22% of cases, it was unsuitable.
Meera Patel, a senior analyst at Hargreaves Lansdown, says her firm avoids the schemes completely. She says: “We will not touch them. They tend to be offshore investments and the vast majority of our clients are UK-based so we have no need to touch these products.”