UCIS Marketing Woes

Regular readers of the FSA’s website will be aware of its continuing interest in unregulated collective investment schemes (UCIS) e.g. they feature in the FSA’s Conduct Risk Outlook 2012 in a list of the most significant retail conduct risks (see Regulatory Roundup 39). Furthermore the Regulator is prepared to take action against the CF10 compliance oversight function (see Regulatory Roundup 35).

Final Notices in respect of P3 Wealth Management and Patrick O’Donnell , its sole director, evidence further FSA action over UCIS misdemeanours. In this particular instance the firm’s Part IV permission was cancelled by the FSA whilst Mr O’Donnell suffered a penalty of £60,000 and has been prohibited from performing any functions in relation to any regulated activity.

Although there is an overlap with the concept of ‘suitability’ (COBS 9), at the heart of the FSA action was Mr O’Donnell’s lack of understanding of the regulatory restrictions surrounding the promotion of UCIS.

Firms are reminded that the promotion of UCIS is subject to the recipient meeting one of the categories in COBS 4.12 – and the need to maintain adequate records to substantiate such categorisation.

Firms may also be able to use one of the exemptions in the Promotion of Collective Investment Schemes (Exemptions) Order 2001 (PCISO) but these can be tricky so it is essential to follow the requirements precisely e.g.:

• the exemption for ‘certificated high net worth individuals’ only applies in respect of UCIS that invest ‘wholly or predominantly in the shares or debentures of one or more unlisted companies’;
• warnings must be given in ‘black, bold type’ and ‘surrounded by a black border’ etc.

One further important aspect to bear in mind is that the UK restrictions on the promotion of UCIS have to be considered in the light of MiFID requirements which take precedence. As such the PCISO cannot be used in connection with MiFID business and the relevant MiFID-derived rules in COBS 4 will always apply.

This can pose problems for MiFID firms as, whilst on the one hand marketing is not a regulated activity, the effect of recital 82 of the MiFID Implementing Directive, means that it will be considered MiFID business if it is deemed ‘preparatory to the provision of an investment service …’ e.g. advising a client to invest or receiving and transmitting orders to the manager/operator of the scheme.

As such, the firm would have to follow the COBS rules and categorise the clients under MiFID.

Complyport clients should feel free to get in touch with their normal contact should they have any particular financial promotion queries.