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ombudsman news

issue 125

May/June 2015

unregulated collective investment schemes (UCIS)

When returns on conventional savings remain low, the high returns promised by, complex, “exotic” investment schemes - involving markets ranging from wine and overseas property to renewable energy - may sound particularly appealing.

However, if something goes wrong, the consequences can be extremely serious. In particular, the risks of investing in unregulated collective investment schemes (UCIS) have received a lot of attention over recent years - both in the media and from the regulator.

Since January 2014 the Financial Conduct Authority (FCA) has restricted the promotion of UCIS (and things like UCIS) to only “sophisticated” and “high net worth” investors - to reduce the likelihood that they’ll be sold to ordinary “retail” consumers.

These rule changes seem to have alerted some investors to review their existing arrangements - and to question the advice they were previously given.

There’s been some confusion over whether or not we can look at complaints about UCIS - because by definition they’re “unregulated”. But while the schemes themselves are unregulated, the actual advice given by businesses is often regulated - and so covered by us.

The fact that someone may appear to be an experienced investor doesn’t automatically mean they’re eligible to have UCIS promoted to them. In many of the complaints we see, people tell us they weren’t made aware of the risks involved in investing in UCIS - or that they didn’t know what exactly they were investing in. Some people say that, until something went wrong, they hadn’t even heard of “UCIS”.

If a complaint is referred to us, we investigate whether the business carried out the checks required at the time they gave the advice to invest. We’ll also look at key sale documents from the time.

Where we decide that advice to invest in a UCIS wasn’t suitable in the particular circumstances, we usually tell the business to put their customer in the position they would be in if they hadn’t received that advice.

What this looks like in practice will depend on the individual circumstances of each case - but will involve considering the consumer’s attitude to risk, their existing assets, their investment experience and their investment objectives.

We publish our approach to these kinds of complaints - with some examples of compensation we’ve told businesses to pay - on our website.

index of case studies

  • 125/8 - consumer complains that money has been invested into UCIS without telling her
  • 125/9 - consumer complains he lost money because he wasn't advised to withdraw from UCIS
  • 125/10 - consumer complains that adviser gave unsuitable advice to invest in UCIS
  • 125/11 - consumer complains that part of the portfolio wasn't suitable for her low-risk attitude
  • 125/12 - consumer complains UCIS was unsuitable after her investments decreased in value
  • 125/13 - consumer complains that he didn't know he'd invested in UCIS

125/8
consumer complains that money has been invested into UCIS without telling her

After her mother died, Mrs L had a significant amount of money to invest. A friend of hers recommended a financial adviser - so she set up a meeting to talk about her options.

During the meeting, Mrs L arranged to invest the money into an offshore bond “wrapper” - containing several different funds. Over the next few years more money was added to some of Mrs L’s existing funds - and the adviser also invested in new funds on her behalf, including some property investments.

Some years later, when reading over her yearly statements from the financial adviser, Mrs L noticed that some of the withdrawals she’d made over the years had come out of the capital. She arranged a meeting with the adviser - explaining that she’d thought she’d been withdrawing the income the investments were making. She was concerned that her investments weren’t doing as well as she’d hoped.

During the meeting, Mrs L found out that around 80% was invested in unregulated collective investment schemes (UCIS).

Mrs L had heard of UCIS and knew that they were very high-risk investments.

She complained to the adviser that she wasn’t happy with how her money had been invested - given she’d told him she wasn’t looking for anything too risky.

But the adviser told Mrs L that, looking at the rules, she was a suitable candidate for UCIS if it was part of a diverse portfolio - as her investment was.

Mrs L told the adviser she wanted to surrender the assets within the fund and get her money back. The adviser said he’d look into it. When she phoned the adviser two weeks later to see what was happening, he told her that the investments had done badly because of the financial crisis - and that he couldn’t be held responsible.

Unhappy with this response and worried about her money, Mrs L complained to us.

complaint upheld

We asked the adviser for the fact-find and suitability report for Mrs L - as well as any other records from the original meeting.

From these, we saw that Mrs L had told the adviser that she was looking to invest the money long-term - and wanted eventually to give it to her grandchildren. She had also told the adviser that, although she was looking for a long-term investment, she needed the flexibility to withdraw money if necessary.

The adviser had recorded Mrs L’s attitude to risk as “cautious”. His definition of a “cautious” investor was someone who “would prefer most of their capital to be in assets which are unlikely to suffer any significant falls in value”. By the adviser’s own definition Mrs L’s portfolio didn’t seem suitable - as around 80% had been invested in UCIS.

The adviser told us that he’d recorded Mrs L as a “category 2 person”, in accordance with the regulator’s rules. This essentially meant that UCIS had been promoted to Mrs L on the basis that this kind of investment was suitable for her.

We explained to the adviser that - in line with the regulator’s rules at the time Mrs L originally invested - we’d need to see that he had taken reasonable steps to ensure a UCIS arrangement was suitable for Mrs L. But when we checked the adviser’s file on Mrs L, we didn’t find any evidence that he’d done this.

We appreciated that property-based investments could form part of Mrs L’s portfolio. But we told the adviser that we wouldn’t expect to see such a high proportion of money invested in property for someone whose attitude to risk had been recorded as “cautious”.

Given everything we’d seen, we decided that Mrs L’s portfolio was unsuitable for her - and we told the adviser to put her in the position she would be in if she hadn’t been given unsuitable advice.

The amount of money involved in Mrs L’s case was significant - and a substantial proportion had been invested in UCIS. To reflect how distressing and upsetting this had been for Mrs L, we told the adviser to pay her £500 compensation.

125/9
consumer complains he lost money because he wasn't advised to withdraw from UCIS

Mr B had been investing through the same financial adviser for fifteen years. In one of their monthly meetings, the adviser recommended that Mr B move some of his money from his “wealth preservation” fund into a new “wealth generation” fund to get a better return.

Mr B agreed to transfer £150,000 to the new fund which included a small proportion in unregulated collective investment schemes (UCIS). After a year, he began to have concerns that it wasn’t doing so well. In their next few meetings, the adviser repeatedly reassured Mr B that he should remain in the fund - saying that investments tend to fluctuate, and that it was nothing to worry about.

However, a few months later, the adviser told Mr B that the fund managers had decided to “wind down” the fund - and that it was likely he’d lose some of his money.

Mr B made a complaint - saying the adviser shouldn’t have put him off withdrawing his money before. He was also unhappy with the advice he’d been given to invest in the UCIS in the first place.

But the adviser insisted the fund had been suitable for Mr B. He also explained that his business wasn’t responsible for the loss, as Mr B had known about the risks involved from the start.

Mr B disagreed with the adviser’s response - and asked us to look into his complaint.

complaint not upheld

We needed to establish whether the advice Mr B had received about investing in the scheme had been suitable for his circumstances and his attitude to risk.

From the adviser’s records, we saw that Mr B’s attitude to risk had been recorded as “high”. Under the relevant rules, he fell within the exemption for “high net worth individuals” - meaning he was eligible to have UCIS “promoted” to him. And looking at Mr B’s investment history, it appeared that he’d invested in other UCIS in the past.

The adviser sent us the documents that Mr B had been given about the fund. These clearly stated the risks involved. We also saw from the adviser’s records that he and Mr B had discussed the risks in a face-to-face meeting.

In light of this, we decided that it was likely Mr B had been aware of the risks involved in the investment.

We asked the adviser about his recommendation that Mr B stay in the fund. He said that for customers with long-term investment strategies - like Mr B - he had recommended that they keep the investment through the “credit crunch”, as he expected that performance would eventually improve. The adviser sent us a breakdown of how the fund had performed since Mr B had originally invested. This showed that, with some fluctuations, the fund had continued to increase in value.

The fund also made up only 3% of the total amount of money Mr B had in investments overall. Given this, we didn’t think it had been unreasonable for the adviser to recommend staying in the fund.

Although we appreciated that Mr B was disappointed about losing money, we didn’t uphold his complaint.

125/10
consumer complains that adviser gave unsuitable advice to invest in UCIS

When Mrs F’s great aunt died, she left Mrs F and her husband, Mr F, a considerable amount of money. After meeting with a financial adviser, they invested £40,000 across several commercial property funds.

When Mrs F died a few years later, Mr F reviewed their joint finances. Concerned that their investments had dropped in value, he phoned the firm of advisers. He explained that he appreciated that investments could fluctuate. But said he and Mrs F had understood that this particular investment scheme would keep their money safe.

Mr F was told that the adviser who the couple had originally met with had retired - but that someone else would get back to him. While he was waiting to hear back from the firm, Mr F found out - through some online research - that since he and Mrs F had invested in commercial property, the property market had declined by around 30%.

Mr F also discovered that the property they’d invested in was part of an unregulated collective investment scheme (UCIS) - and that the arrangement involved “gearing”. This meant that some of the investment was funded by borrowing - which could make any gains, or losses, far larger.

Mr F complained to the firm of advisers straight away - saying he was unhappy that the adviser hadn’t told him and his wife that the scheme was a UCIS, or highlighted that “gearing” was involved.

When they responded, the firm said that, according to their notes, the now-retired adviser had shown Mr and Mrs F a prospectus for various property investments. However, they said that they had no record of advice being given - and believed that Mr and Mrs F must have made their decision themselves later on.

Mr F disagreed with this version of events - and complained to us.

complaint upheld

First we needed to establish whether Mr and Mrs F had received advice. So we asked the advisers for their records relating to their dealings with the couple.

The firm said that because the investments were made some years ago, they no longer had all the relevant documents - including the fact-find and suitability letter. But they were able to send us records of several meetings the adviser had with Mr and Mrs F - as well as Mr and Mrs F’s application forms.

Looking at the notes from Mr and Mrs F’s meeting with the adviser, we saw that the adviser had discussed the advantages and disadvantages of various options - and had recommended investments that would meet the objective of “capital growth”.

We also found an internal note attached to one of the application forms, saying that the adviser should now fill in the boxes relating to commission - which we thought strongly suggested that Mr and Mrs F thought they were paying for advice. And there was nothing in the notes indicating that any investments would be made on an “execution-only” basis.

We explained to the firm that, in light of this evidence, we took the view that Mr and Mrs F had received advice.

We saw from the meeting notes that the couple had both been categorised as having a “medium” attitude to risk. It seemed that Mr F had invested before, but had no previous experience of UCIS. When we asked Mr F about his investment history, he sent us information about his portfolio - which, in our view, was in line with a “medium” attitude to risk.

The notes from Mr and Mrs F’s initial meeting with the adviser suggested that they had been looking to diversify their assets by investing a small proportion into property.

We asked the firm to explain how they’d decided that the UCIS was appropriate for Mr and Mrs F. However, they couldn’t provide us with any evidence about the steps they’d taken to check - or show how they’d reached their decision.

Looking at the brochure about the investment in question, we found that the information about “gearing” was more than halfway through the 90-page document. There was no record that the gearing - or the implications of this - had been discussed with Mr and Mrs F.

We were concerned that this major risk hadn’t been highlighted - and that the firm couldn’t explain why less risky, non-geared funds hadn’t been suggested.

We acknowledged that Mr and Mrs F could be considered “high net-worth” customers. But given everything we’d seen, we decided that the advice they’d received to invest in the UCIS was unsuitable.

In the circumstances, we told the advisers to compare the performance of the investment in the UCIS with the performance of the FTSE Property Index - taking into account any withdrawals or income Mr and Mrs F had taken over the years. If the calculation showed a loss, the advisers should pay compensation accordingly.

125/11
consumer complains that part of the portfolio wasn't suitable for her low-risk attitude

When Mrs S downsized to a smaller house, she invested the money she made.

A year later, Mrs S received a letter from the fund manager of one of her investments. This explained that the fund had been investigated by the regulator - and would be “suspended” until the regulator made a final decision about it. The letter also mentioned that the fund was an unregulated collective investment scheme (UCIS).

Concerned that her money wasn’t safe, Mrs S contacted the financial adviser she’d made the investment through. The adviser told Mrs S that if the fund was suspended, all shareholders would be likely to lose some of their money - but that she’d have to wait until the regulator made a decision.

Unhappy, Mrs S complained about being advised to invest in the fund in the first place. She said that she didn’t feel that a UCIS was right for her - as she’d clearly said she didn’t want anything too risky.

When the adviser maintained that their advice had been suitable, Mrs S complained to us.

complaint upheld

We asked the adviser for records of their original meeting with Mrs S. We saw that her attitude to risk had been discussed in detail - and it was clear that she didn’t want to take any risks with her money.

The adviser told us that they felt that Mrs S’s portfolio was balanced. They said they’d recommended a mixture of “low” and “cautious” risk investments - to ensure she got the returns she wanted.

We accepted that - from what we knew about Mrs S’s circumstances - some exposure to cautious risk might have been suitable. But we didn’t think that it was suitable to have 40% of her money in UCIS.

The adviser told us the fund’s literature had described it as “a lower risk investment solution”. However, we pointed out that as a financial expert, the adviser should have been aware of the higher risks associated with UCIS - and carefully considered whether the fund was suitable for Mrs S.

We told the adviser to put Mrs S in the position she would be in if her money hadn’t been invested in the unregulated fund.

In the circumstances, given Mrs S’ cautious attitude to risk, we thought it would be fair to compare the performance of her investments with a mix of the average rate for fixed-rate bonds and the FTSE WMA Stock Market Income index (an index made up of a range of asset “classes”). The adviser should then pay any losses to Mrs S.

125/12
consumer complains UCIS was unsuitable after her investments decreased in value

Mrs D had invested several hundred thousand pounds over a number of years. When her financial adviser retired, she took advice from a new firm recommended by her previous adviser.

On the new adviser’s recommendation, Mrs D surrendered some of her investments and split her money across two collective investment funds. A year later the adviser contacted Mrs D to say he had concerns about one of the funds - and suggested that she switch to a different fund.

Mrs D agreed. But a couple of years after that, the adviser told her that the new fund had “suffered financial distress” and was being closed.

At this point, Mrs D emailed the adviser to complain. She explained that she relied on her investments for an income - and was worried that they were now worth a lot less than under her original arrangement. She felt that the adviser shouldn’t have recommended funds that would decrease in value so quickly.

The adviser told Mrs D that the funds had been a good addition to her overall investments - helping her to diversify and reduce risk. They said that the funds’ troubles were just “unfortunate”.

Unhappy with the adviser’s response - and concerned about how she would cover the losses - Mrs D asked us to step in.

complaint upheld

We needed to establish whether the advice Mrs D had been given was suitable for her circumstances and investment experience.

Mrs D told us that she’d always been cautious with investments - particularly after her husband died, when she’d become solely responsible for paying off the rest of their mortgage.

Mrs D told us she’d been very clear with the adviser that she couldn’t afford to take any risks with her money. She sent us paperwork showing that her only sources of income were her investments and her state pension. And taking into account her mortgage, her income only just covered her outgoings.

When we asked the adviser for all their records about Mrs D, we saw they had categorised her attitude to risk as “balanced”: According to their definition, this had meant that she understood “that capital and income will fluctuate in value” and that she was “prepared to face short term fluctuations for the potential of medium/long term returns”.

It had also been noted that Mrs D “would like to take advantage of some equity investment with the prospect of good long-term returns” - and was “happy to balance this with other asset classes such as property and fixed interest.”

However, looking at the funds the adviser had gone on to recommend, we didn’t agree that the risks involved were low, or even balanced. Both of the funds were offshore and “geared” (involving borrowing) - and both were UCIS.

We read the fact find and notes from the meetings Mrs D had had with the adviser. We couldn’t see anything to show how the adviser had assessed Mrs D’s attitude to risk - or whether she was eligible to have UCIS promoted to her. And she didn’t fit any of the relevant exemptions.

During our involvement, the adviser accepted that the funds had been too risky for Mrs D - and offered to put her in the position she would be in if she’d received suitable advice.

Mrs D had made some calculations about how much she she’d lost out by - and we and the adviser agreed that her figures were fair.

125/13
consumer complains that he didn't know he'd invested in UCIS

Mr W had recently retired - and after selling part of his business, had a lump sum he wanted to invest.

During a meeting, his financial adviser recommended some funds that she said she’d recently invested in herself - both commercial property investments. So Mr W invested a total of £400,000 across the two funds.

From his yearly statements, Mr W noticed the value of the funds had been gradually declining. When he looked into the funds in more detail, he found that they were part of an unregulated collective investment scheme (UCIS).

Mr W complained to the adviser - saying he hadn’t known he’d invested so much in UCIS, and felt his money was at risk. But the adviser said that the funds were suitable for Mr W because he’d been classified as a “very speculative” and “sophisticated” investor. So they didn’t agree with his complaint.

Unhappy with the adviser’s response, Mr W asked us to step in.

complaint upheld

The fact-find from Mr W’s meeting with the adviser confirmed that the financial adviser had assessed Mr W as a “very speculative” and “sophisticated” investor.

However, Mr W told us he’d just wanted a greater return than a standard deposit account. He said that because he was retired, he couldn’t afford to invest in anything too risky.

When we asked the adviser how she’d reached her assessment of Mr W, she told us that she’d based it on his previous investment experience. The adviser said she felt Mr W should be familiar with the risks - as he’d invested in property before, when he ran his own business.

The adviser sent us the “sophisticated” investor certificate that Mr W had signed. When we showed this to Mr W, he said he’d thought that it said “sophisticated” because he was investing quite a lot of money. But he said he didn’t know what it actually meant.

Looking at the details of the investments, we found the funds involved two specific geographic markets. They belonged to a single “asset class” - and from our experience, were very high-risk.

We also found some differences between the details in the fact find and what Mr W told us. In particular, the level of assets Mr W told us he had was far lower that what was recorded in the fact find. This meant that, whereas the adviser had said 25% of Mr W’s assets were in UCIS, the actual proportion was 80%.

We couldn’t say for sure why there was a discrepancy - or whether Mr W had seen the fact find. But we noted that, at the time he received the advice, Mr W was already retired - and didn’t have any way of recouping any losses. In the circumstances, we didn’t think the portfolio had been sufficiently diversified.

We explained to the adviser that, in our view, Mr W’s previous investment experience didn’t suggest that he had a “very speculative” attitude to risk. We also pointed out that even if Mr W could be classified as a “sophisticated” investor, he wasn’t automatically a suitable candidate for UCIS.

From the evidence we’d seen, it was clear that Mr W had no previous knowledge or experience of UCIS. And the adviser couldn’t show us how she’d decided that the UCIS was appropriate for Mr W - or that they’d drawn any of the risks to his attention.

We didn’t think the adviser had correctly identified Mr W’s attitude to risk - and we decided that the advice he’d received was unsuitable. So we told the adviser to put him in the position he would be in if she hadn’t given him unsuitable advice.

Recognising that Mr W wanted capital growth - and was willing to accept some level of risk - we told the adviser to use, for comparative purposes, a FTSE index representing a mix of asset “classes”.

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ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.