The FCA, in PS13/3, has very recently announced the new Rules that, with effect from 1 January 2014, will classify the persons to whom Unregulated Collective Investment Schemes (and their close-substitutes) may be distributed. The FCA encourages all Firms to adopt these provisions sooner than 1 January 2014 in light of the fact that the Regulator feels these are wholly unsuitable investments for the vast majority of Retail Clients.
Whom will this impact?
All entities which promote and/or provide advice in regard to Unregulated Collective Investment Schemes and their close substitutes.
Of particular note:
- The FCA has coined a new Definition: Non-Mainstream Pooled Investments (‘NMPI’); this is a collective definition which includes Unregulated Collective Investment Schemes (‘UCIS’) and other forms of Pooled Investments such as QIS, certain SPVs which have similar attributes and Traded Life Policy Investments (‘TLPI’).
- The FCA specifically differentiates between the definition of a Retail Client and a Retail Investor. The term Retail Investor deals with Retail Client for the purposes of distributing NMPIs.
- In summary, no NMPI may be promoted to a Retail Investor unless an exemption applies and/or they are the type of ‘person’ permitted and certain processes have been followed. It is important to also bear in mind that the FCA’s view is that the Activity of Advice contains the activity of Promotion. Advice, and therefore promotion, is also considered to be part of a Discretionary Investment Management service.
- The FCA’s central premise is that in almost all cases NMPIs are automatically unsuitable for Retail Investors. This is why, so as to avoid problems in the future, the FCA has effectively banned the promotion and the advising of NMPIs to Retail Investors.
- The FCA states that it has considered the impact of AIFMD, which only permits the Marketing of AIFs (which in many cases will be NMPIs) to Professional Investors unless the Member State specifically permits the Marketing of these to Retail Investors on at least the same terms. Therefore, the UK will permit, to a limited degree, the Marketing of AIFs to Retail Investors as evidenced with these new Rules effective from 1 January 2014.
- The FCA has announced it will undertake further consultation on similar investments which are not ‘pooled’, but have similar risk profiles, in order to ban, where appropriate, their distribution to Retail Investors.
We draw your attention to:
- Annex 4 – a very helpful decision tree to assist in determining to whom various types of NMPI these may, or may not, be promoted/advised to Retail Investors.
- COBS 4.12 (set Time Travel, at top of page, to 1 January 2014): has been completely re-written. This was the Rule which scheduled the ‘types of person’ to whom a UCIS could be promoted. Subject to the detail, which must be read in conjunction, the following ‘persons’ may have NMPIs promoted/advised to them:
- Replacements (i.e. when replacing an existing UCIS held);
- Certified High Net Worth Investors (the Handbook helpfully includes in its Rules, for the first time, the category of Person also permitted by UK Law – this approach avoids confusion and brings together all of the types of permitted Person in one place);
- Enterprise and Charitable Funds;
- Eligible Employees (interestingly this will help facilitate AIFMD’s Remuneration Rules on holding investments in the AIF it Manages);
- Members of the Society of Lloyd’s;
- Exempt Persons;
- Non-Retail Clients (i.e. this replaces existing Cat. 7 which permits the promotion of UCIS to Professional Clients and Eligible Counterparties);
- Certified Sophisticated Investors (again this is included from UK Law as per 8.1 above);
- Self Certificated Sophisticated Investors (again including those permitted by UK Law as per 8.1 above);
- Solicited Advice (rather strangely worded but means, essentially, where a Client has asked specifically to be advised on investing in an NMPI and has not, at any point, received a promotion of an NMPI from that same Firm or a connected Firm);
- Excluded Communications;
- Non-Recognised UCITS (i.e. UCITS which are Authorised in another EEA State but which has not sought to Passport the UCITS into the UK market); and
- US Persons (permits the Promotion of US Private Funds to US person under US tax legislation or who owns a US Qualified Retirement Plan (e.g. a 405K plan).
What is the impact on our typical Hedge Fund Manager Client (which promotes to UK investors)?
All Firms’ Compliance Manuals, policies and procedures in regard to the Promotion of UCIS (now NMPI) will need to be reviewed and updated accordingly. It is vital that Firms adopt the required processes and approach as soon as possible when undertaking the promotion of NMPIs to ensure it is ONLY promoting these to permitted persons.
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