14th November 2012
Mr Jason Pope
Conduct Policy Division
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
22 City Road
Finsbury Square
London EC1Y 2AJ
Tel: +44 (0) 20 7448 7100
Fax: +44 (0) 20 7638 4636
Email: [email protected]
Email: [email protected]
Dear Mr Pope,
APCIMS1 response to CP12/19 :Restrictions on the retail distribution of UCIS and close
substitutes
APCIMS welcomes the opportunity to comment on the FSA’s proposals as regards future retail
investor access to UCIS and other like products, particularly in light of the fact that the FSA’s
proposals appear (a) to be based upon supervisory and enforcement work focussed entirely upon
UCIS promotion within the IFA sector; (b) not to have taken account of the circumstances in
and purposes for which APCIMS firms may purchase such products for their clients; and (c) to
indicate a sweeping and undifferentiated approach by the FCA to the use of its much-heralded
product intervention powers.
Given the seriousness of these concerns, APCIMS would like to meet with the FSA to discuss
the CP12/19 proposals in greater detail. In doing so, we would like to involve a small number of
our member firms who could provide a clearer insight into both how UCIS and other like
instruments may be suitably used for retail investors and the detriment that is likely to accrue to
such investors if access to these investments is significantly curtailed.
In the pages that follow, we identify a range of difficulties – some practical, others more
fundamental – arising from the CP12/19 proposals. At the outset, however, APCIMS would like
to clearly state its view that, instead of imposing significant restrictions across a broad range of
the investment options currently available to retail clients, the FSA/FCA should:
1 The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is a trade association
representing 183 member firms. Of this number 119 members are private client investment managers and
stockbrokers and 64 are associate members who provide related services to our firms. Member firms deal primarily
in stocks and shares as well as other financial instruments for individuals, trusts and charities and offer a range of
services from execution only trading (no advice) through to full portfolio management.
Our member firms operate at more than 580 sites in the UK, Ireland, Isle of Man and Channel Islands, employing
c.31,000 employees. Over £475 billion of the country’s wealth is under the management of our members. Our aim is
to ensure that regulatory, tax and other changes across Europe are appropriate and proportionate for the investment
community.
Association of Private Client Investment Managers and Stockbrokers
Company limited by guarantee
Registered in England and Wales No. 2991400
VAT Registration No. 675 1363 26
(1) focus its supervisory and enforcement powers on ensuring that current requirements aimed
at ensuring high standards of client care are complied with. Handbook requirements in
relation to suitability, clients’ best interests, conflicts of interest and “fair, clear and not
misleading” communications are the essential cornerstones of retail regulation – by
indicating that these standards cannot be made to work in relation to certain types of
investments, the FSA risks undermining their general effectiveness.
(2) retain the current COBS 4.12 regime in respect of UCIS and consider enhancing it by:
• requiring firms to institute systems and controls (i.e. of the type proposed in draft COBS
4.11.4R to 4.11.7R) aimed at ensuring that attention is properly focussed on whether and
how such products should be promoted to retail clients;
• requiring firms to report the scale and nature of their activities in such products to the
FSA; and
• using the permissions regime (or, more specifically, the FSA’s powers to impose
limitations on firms’ permissions) to ensure that such business can only be undertaken by
firms that have both the requisite systems and controls in place and the financial
resources necessary to compensate clients in instances where advice given proves not to
have been suitable.
(3) clearly establish (through supervisory work and dialogue with industry) whether these
enhanced controls should also be applied to a more concisely defined cadre of “close
substitutes”.
Reasonableness of the FSA’s proposals
APCIMS’ primary concern in relation to the CP12/19 proposals is that they represent a
disproportionate and indiscriminate response on the FSA’s part to supervisory findings which
have, so far, been restricted to a very small number of firms (all operating in one particular sector
of the market) and a very small sample of those firms’ clients. While we agree that the examples
quoted in paragraph 1.13 of the CP and in the July 2010 “UCIS: good and poor practice report”
are indicative of unacceptably low standards of client care, we do not believe that it is reasonable
for the FSA to extrapolate findings derived from a study of only 14 IFA firms across the entire
population of authorised firms acting for retail clients in relation to such investments. The fact
that, amongst the reviewed firms, only one case in every four appeared suitable for the customer and that
almost two-thirds of distributors in the review failed to understand the existing restrictions on the promotion of
these products to retail customers is shocking but it does not give the FSA a firm evidential base from
which to conclude that similar levels of non-compliance prevail throughout the industry. The
setting of regulatory standards should not be driven by an automatic assumption that all firms
inevitably conduct their business to the same extremely low standards as the worst performers
identified by FSA research. The poor behaviour of such firms should attract stringent discipline
– it should not result in whole asset classes effectively being declared out-of-bounds for all retail
clients.
Similarly, just because some firms have been found to have recommended UCIS to consumers in
ways that are clearly unsuitable, it should not be assumed that all firms are similarly cavalier in
their approach to UCIS investment. It is clear from discussions with APCIMS member firms
that:
• UCIS are generally used sparingly within retail client portfolios (both in tandem with and in
support of more traditional investment holdings) and are the subject of enhanced due
diligence, investment selection and compliance controls;
2
• UCIS are widely regarded as valuable investment management tools which aid diversification
(both across asset classes and jurisdictions), reduce portfolio volatility, provide lower cost
access to assets than many equivalent regulated products and have demonstrable, long-term
tax advantages;
• UCIS may be used even where the same fund is available in UCITS or investment trust
formats, e.g. where liquidity in the relevant UCITS or investment trust is unavailable or
because the UCIS provides a “purer” way of accessing the relevant manager’s investment
skills.
As well as considering the FSA’s 2010 review sample too small and too narrowly-focussed to
provide a reasonable justification for instituting significantly enhanced promotional restrictions
for UCIS, we do not see how such small-scale findings in relation to UCIS can serve as the basis
for an extremely wide-ranging regime that seems likely to impact upon some forms of
investment (e.g. ETFs) which are very commonly held by private investors and which are valued
by portfolio managers for providing diversified access to alternative asset types at relatively low
cost and in a way which allows for accurate tracking of relevant benchmarks. More specifically,
we do not believe that all of the products likely to fall within the “non-mainstream pooled
investments” (NMPI) definition share the problematic characteristics that the FSA identifies in
Chapter 2 of CP12/19. In attempting to proscribe the promotion of investment products that
may be “close substitutes” for UCIS, the FSA has coined a definition which is so vague as to be
impracticable and so wide-ranging as to impose serious constraints upon firms’ ability to deploy
their investment expertise in their clients’ best interests.
APCIMS is, of course, aware that the FCA will have enhanced product intervention powers,
allowing it, as Martin Wheatley recently said, to intervene where we feel products have been inappropriately
sold or are simply bad products and we are supportive of those powers to the extent that they are
used judiciously and their exercise is supported by reasonable evidence. We do not believe,
however, that the FSA should be rushing to take advantage of those powers without being able
to provide satisfactory evidence that the resulting restrictions on client choice and on firms’
businesses are genuinely justified. In his recent speech to asset managers, Martin Wheatley
referred to the CP12/19 proposals, saying: This is not going to be about us being restrictive or heavyhanded. We will only use this new power in the worst cases, where we have to step in to stop people being ripped
off. While APCIMS is wholly supportive of the FSA taking regulatory action in relation to misselling abuses of the type identified by the FSA’s UCIS review, we believe that the current
proposals are not only restrictive and heavy-handed but will also serve to undermine firms’ faith in
the FSA’s judgement, technical know-how and understanding of their business.
Finally, UCIS and other types of investments likely to fall within the NMPI definition will be
“retail investment products” subject to the new charging, advice and professionalism standards
of the RDR. Given that implementation of the RDR is imminent and that both the FSA and
industry have expended huge levels of resource in understanding and preparing for it, we do not
understand why the FSA considers now to be the right time to push ahead with an additional
layer of regulation before it has had the opportunity to ascertain the RDR’s impact upon the
market. In the absence of high levels of commission, it may well be that smaller advisers of the
type covered by the FSA’s UCIS review will no longer be driven to recommend such products
regardless of their suitability for clients, leaving the retail market for UCIS in the hands of firms
that value them as constituents of diversified investment portfolios.
Other issues requiring consideration
APCIMS believes that the CP12/19 proposals must be significantly revised if they are not to
impose disproportionate and unjustified constraints on the operation of the retail market and,
indeed, if the FSA/FCA is genuinely seeking to be, as Clive Adamson recently indicated in his
3
speech to asset managers, a more open, engaged and listening regulator, which will act from a position of
greater understanding of the relevant sector. Our further comments on the CP12/19 proposals –
outlined in both this covering letter and in the appendix containing our responses to the Annex 5
questions – are provided in this context.
Identifying NMPIs
APCIMS’ comments on the types of investments likely to be caught within the NMPI definition
are given in response to Question 3; here we focus on the practical difficulties attendant upon
that definition being given effect. As we have commented to the FSA in the past, when rules are
made that require differential treatment of investors in respect of specific investment types or
products, it is not necessarily an easy matter for firms to identify such investments or to gather
data on them. This is a point we made in our response to CP09/18 in relation to certain
constituents of the “retail investment product” definition (e.g. UCIS and structured products)
where a firm’s ability to undertake a comprehensive analysis of all the products within a relevant
market is likely to be hampered by the fact that it is sometimes difficult to identify what legal
form a product takes let alone to access reliable, consolidated market data enabling comparison
of products across a particular category.
We have already had correspondence with the FSA about the challenges that firms face in
identifying UCIS and thereby ensuring that such products are subject to effective controls as
regards due diligence and distribution. In order for firms to develop systems that alert individual
advisers/fund managers to the status of a fund and to the need for enhanced due diligence and
additional consideration of client suitability and knowledge/experience issues, they need data
that can be loaded into their IT systems in a consistent format and that can be regularly updated.
While firms can manually check the FSA Register to see whether a particular fund is UK
authorised or recognised (or, if it is not featured on the Register, conclude that it is a UCIS), this
is extremely labour-intensive, relies on client-facing staff identifying “new” funds that have yet to
be checked and provides data that can only be kept up-to-date by further manual checks. The
problem so far as APCIMS firms are concerned is that the CIS element of the Register is not
available in the form of a simple list of ISINs which could be used by data providers to develop
a “regulated CIS” identifier. Data providers are able to identify CIS in general for their clients –
if they were able to develop a “regulated CIS” identifier based on ISINs, all other CIS would
automatically be deemed “unregulated” and firms would consequently have access to the data
they need for their in-house controls and procedures. While we welcome the FSA’s willingness
to engage with industry on this issue, we believe it would be unreasonable for the FSA to impose
requirements which firms have no practical means of complying with. We also note the FSA’s
intention (referred to in paragraph 8.24 of DP12/1) to make changes to the Register to
accommodate data on different types of AIFMs and AIFs – perhaps further changes to facilitate
firms’ identification of regulated and unregulated CIS might also be considered in this context.
The fact that the proposed NMPI definition includes some SPV-issued securities by reference to
their underlying assets is likely to make identification even more difficult. A number of firms
have commented on the fact that it is often unclear whether an ETF is a UCITS or not. While
the ESMA Guidelines published in July 2012 state that a UCITS ETF should use these words as
an identifier in its name, fund rules or instrument of incorporation, prospectus, key investor information
document and marketing communications, it is unclear to what extent these guidelines have yet been
implemented either in the UK or elsewhere. Furthermore, even if a UCITS ETF bears the
required identifier, firms will still need to ascertain whether it is a UK-recognised UCITS or a
UCIS.
Finally, given the extreme vagueness with which the exemption in paragraph (c)(iii) of the
proposed NMPI definition is drafted – a security whereby the issuer’s payment obligations to the investor
4
are linked to, contingent on, highly sensitive to or dependent on, the performance of or changes in the value of shares
or bonds admitted to or dealt on a regulated market or on a market that is recognised as a market or exchange by
an overseas regulator – how does the FSA believe that consistency will be achieved across the
market as regards which SPV-issued securities are deemed to be NMPIs and which are not? Who
is to determine what proportion of investment in shares/bonds traded on a regulated market will
meet the extremely subjective thresholds underlined above? Will the producers of such products
be required to determine their status vis-à-vis the NMPI definition and to disclose that status
clearly to all distributors? When asked similar questions by the industry in relation to the sorts of
investments likely to fall within paragraph (g) of the “retail investment product” definition, the
FSA’s response was limited to a statement that was generally considered by industry participants
to be both unhelpful and unreasonable : If firms are in doubt they should assume that products are caught.
A similar approach to the proposed NMPI definition would not only be unhelpful for firms but,
more importantly, would also result in markedly inconsistent treatment for investors.
Use of the statutory exemptions
APCIMS believes that the FPO and PCISO exemptions in respect of sophisticated and high net
worth investors are not fit for the purpose for which the FSA proposes that they be used.
Specifically:
•
•
we query whether the limitations which the section 48 and 50A FPO exemptions place upon
the types of investment for which financial promotions can be made to certified high net
worth individuals and self-certified sophisticated investors mean that these exemptions
would not be relevant to many of the investments that seem likely to fall within paragraph (c)
of the NMPI definition. Sections 48 and 50A both state that the exemptions they provide are
only available if the financial promotion in question relates to an investment which is itself a
share or debt instrument of an unlisted company or which invests in or confers
rights/entitlement to such unlisted shares/debt instruments. Given that many of the SPVissued securities falling within paragraph (c) may themselves be listed securities and may
invest not only in listed securities but also in other asset types altogether (metals, oils,
agricultural commodities), it seems unlikely that the exemptions will be usable. Similarly, the
section 21 and 23A PCISO exemptions can only be used in respect of an unregulated
scheme which invests wholly or predominantly in the shares in or debentures of one or more unlisted
companies – given that many UCIS maintain a very similar investment base to their regulated
UCITS counterparts, we believe that the number of UCIS meeting the paragraph (8)
restrictions will be relatively small.
we query how the FSA envisages firms making use of the section 50 FPO exemption for
sophisticated investors when paragraph (2)(b) makes clear that a firm cannot invite/induce
the recipient of a financial promotion to engage in investment activity with it if it is the
person who signs the certificate confirming the investor’s status. A firm that has longstanding clients for whom it believes that non-UCIS NMPIs might be suitable would only be
able to use this exemption if it found another authorised firm willing to certify them as
sophisticated – it seems to us unlikely that a third party would want to assume responsibility
for making this assessment when the client’s long-term financial adviser/manager is not only
in an altogether better position to do so but will also benefit from the resulting business.
Similarly, the section 23 PCISO exemption means that a firm cannot invite or induce an
individual that it has certified as sophisticated to participate in a UCIS that it operates –
consequently, where a firm has constructed a UCIS around the specific circumstances and
needs of particular elements within its client base, it will be in the anomalous position of only
being able to make that scheme available to clients who have been certified as sophisticated
by a third party.
5
More generally, in proposing that firms should use FPO exemptions to promote non-UCIS
NMPIs to sophisticated and high net worth individuals, CP12/19 explains that : In practice, firms
that wish to promote non-mainstream pooled investments other than UCIS to sophisticated and high net worth
retail investors will be able to do so if the promotion is an ‘excluded communication’. Excluded communications
include financial promotions that would benefit from an exemption in the FPO if they were made by an
unauthorised person. Essentially, this means that authorised persons can make use of the FPO exemptions,
including those for sophisticated and high net worth retail customers. Authorised persons must still comply with
our high-level requirements to act in the best interests of clients and, where advice is provided, to ensure the advice is
suitable.
What the CP does not make clear, however, is that the implementation of MiFID resulted in the
FPO exemptions no longer being available for MiFID firms to use. Paragraph 2.34 of CP06/20
stated : for MiFID firms carrying on MiFID business and communicating in relation to a MiFID instrument,
the FPO exemptions will not be available and the relevant financial promotion rules in NEWCOB will apply.
…. This will affect, for example, firms who rely on the one-off exemption, the exemptions relating to high net
worth individuals or sophisticated investors, or the ‘sale of a body corporate’ exemption. Given that APCIMS
members are MiFID firms providing MiFID services (i.e. investment advice and execution of
client orders) in relation to MiFID instruments (i.e. the SPV-issued securities featured in
paragraph (c) of the NMPI definition), the FPO exemptions will not be available to them and
any promotions they make to sophisticated or high net worth individuals will be subject to full
compliance with the COBS 4 financial promotions requirements. We do not understand how
retail investors are likely to benefit from a situation where unauthorised firms (able to use the
FPO exemptions without regard to the COBS financial promotion requirements) are at a
decided advantage over authorised firms in promoting investments to them.
Application to discretionary clients
There is no indication in CP12/19 that the FSA has considered the application of its NMPI
proposals in relation to discretionary-managed portfolios. It is reasonably clear that transactions
undertaken on a discretionary basis will not generally involve promotion (indeed, this point is
made in paragraph 1.8 of the FSA’s July 2010 “UCIS: Project Findings”) – are we therefore to
conclude that investment managers will be able to continue to purchase NMPIs for discretionary
portfolios regardless of whether the clients involved meet the sophisticated and high net worth
criteria and fall within the relevant PCISO/FPO exemptions? We believe that in scenarios where
NMPIs are considered to be suitable investments with regard to a client’s overall investment
objectives and risk parameters, in keeping with COBS 9 requirements as to the client’s
experience, knowledge and understanding and in the context of broadly-based, well-diversified
portfolios, discretionary business should be able to continue as at present. The fact that the
consultation is silent as regards discretionary investment in UCIS and NMPIs serves to highlight
the limited nature of the thematic work upon which these proposals rests – analysis of 109
advised sales cases arising from 14 IFAs cannot be regarded as an adequate basis for imposing
significant constraints on the business of all investment managers acting for discretionary clients.
Execution-only business
We welcome the statement in paragraph 1.25 of CP12/19 that the FSA does not intend to
restrict execution-only sales of UCIS and NMPIs where it is genuinely the case that a retail customer
seeks out an investment, acting entirely on their own initiative (for instance, following their own research on
investments). However, the FSA must realise that a firm which executes a client order in these
circumstances will have no idea as to whether the client is truly acting on his own initiative or
whether he has received advice on the investment in question from another source. We would
welcome confirmation from the FSA that execution-only firms will be free to execute client
6
orders (subject to the application of the appropriateness requirements) so long as the firm itself
has not provided advice of any kind to the relevant client.
APCIMS members whose business focuses on or consists entirely of execution-only trading
often provide investment data and filtering tools to assist their clients with their own research
and decision-making. It would be useful if the FSA could confirm that – so long as the material
provided does not amount to an invitation or inducement to engage in investment activity but, as
per PERG 8.4.4G, seeks merely to inform or educate about the mechanics or risks of investment – firms
would not be considered to be engaged in promoting such products and therefore subject to the
FSA’s proposals.
Finally, in relation to the COBS 10 appropriateness requirements:
•
•
we are unclear about whether the inclusion of listed/exchange-traded products in the NMPI
definition could result in an anomalous situation where an investment which, in an advisory
context, the FSA regards as so high risk that its distribution must be limited to very small
numbers of sophisticated/high net worth individuals is also, in an execution-only context,
one for which no appropriateness test is needed. While CESR made clear in its November
2009 statement on the MiFID appropriateness requirements that shares in a non-UCITS
collective investment undertaking that takes the legal form of a corporate body should be assessed against
the Article 38 criteria, it is not clear to us that all products potentially caught within the
NMPI definition would automatically fall within this class. We would welcome the FSA’s
views on this point. In addition, if all NMPIs are considered to be complex, would the FSA
consider amending the COBS 10.4 provisions to make this point quite explicit?
we are unclear whether, in describing UCIS/NMPIs as having characteristics such that
ordinary retail investors are unlikely to fully understand or be able to adequately assess the investment and its
risk, the FSA is effectively indicating that it will be almost impossible for a firm to meet the
COBS 10.2.1R(2)(a) requirement to determine that the client has the necessary experience and
knowledge in order to understand the risks involved in relation to the product. While the FSA states that
the CP12/19 proposals will not restrict execution-only investment, its stated view about the
level of understanding that an ordinary retail investor is likely to be able to achieve in relation
to UCIS/NMPIs points to a rather different conclusion. We would like to understand the
FSA’s policy intent in this area – if it believes that firms will not be able to reach the required
appropriateness determination in relation to the bulk of ordinary retail investor”, it should say
so.
Operation of proposals vis-à-vis European legislation
The AIFMD is only briefly mentioned in CP12/19 and then only in relation to QIS. However,
given the very wide range of products likely to be categorised as AIFs (i.e. any collective
investment undertaking that is not categorised/regulated as a UCITS), the promotional
restrictions to which they will generally be subject and the enhanced criteria required for retail
distribution, we query whether the FSA can be confident at this stage that its proposal to impose
purely domestic restrictions on UCIS and similar pooled products will not either exceed AIFMD
requirements or cut across them in ways that will subsequently require further revision. With the
Level 2 implementing measures for the AIFMD still awaited from the European Commission,
we query whether the FSA (or indeed HM Treasury) can be certain that UK implementation will
not require changes to existing statutory instruments affecting investment promotion, possibly to
the extent of significantly amending certain of the exemptions upon which the FSA’s current
proposals rely.
As noted above, APCIMS members are MiFID firms providing MiFID services in relation to
MiFID instruments and, as such, do not understand on what basis the FSA believes that it is free
7
to impose promotional restrictions which do not in any way reflect MiFID requirements.
Nowhere in CP12/19 does the FSA either acknowledge that its proposals are likely to be superequivalent to MiFID or seek to justify their imposition with regard to the Article 4 criteria. We
would like to understand whether the FSA consider its proposals to be outside of MiFID’s remit
and, if so, upon what grounds or, if not, what justification the FSA intends to provide to the
European Commission for domestic requirements that clearly exceed any of the investor
protection measures considered appropriate in respect of services/investments falling within
MiFID.
As indicated earlier, APCIMS and its members would welcome the opportunity to discuss the
CP12/19 proposals with the FSA – we will be in contact shortly to arrange a suitable meeting
date.
Yours sincerely
Sarah McGuffick
Regulatory Consultant
8
FSA questions : Annex 5, CP12/19
Q1.
Do you agree that we should look to impose restrictions on the promotion of nonmainstream pooled investments to ordinary retail investors?
No. We recognise that some firms involved in the distribution of UCIS and other like products
have failed to meet the required regulatory standards and have, indeed, advised retail clients to
purchase such products in scenarios where they were manifestly inappropriate to their
circumstances. Notwithstanding this, we do not believe that the ability of retail investors to
access such products should be restricted in the manner proposed – we fail to see how the
detriment sustained by a relatively small number of retail investors can effectively be deemed to
“trump” the ability of all other retail investors to access both the widest possible range of
investment vehicles and expert advice on them.
Promotional restrictions and other customer care obligations (e.g. as regards suitability, client’s
best interests and conflicts of interest) already exist with a view to ensuring that such products
are only sold to investors for whom they are an appropriate investment solution – we believe
that the FSA should be focussing its supervisory and disciplinary powers on ensuring that such
requirements are enforced rather than imposing across-the-board restrictions which are likely to
impede investor choice, to deprive advisers and fund managers of legitimate investment options
that may be advantageous for a significant proportion of their clients (including many who
would not otherwise meet the sophisticated or high net worth criteria) and, in certain instances,
to undermine government efforts to encourage investment in entrepreneurial ventures.
In Annex 1 to CP12/19, the FSA estimates that between 1000 and 3000 distributors …. are involved in
the promotion of all types of non-mainstream pooled investments to retail customers. Given the potentially
large number of firms involved and the significant impact that these proposals may have on their
business and on their clients, we do not believe that it is reasonable to base what is effectively a
blanket prohibition on:
• a 2010 exercise involving a high level, desk-based review of 66 independent financial adviser (IFA)
firms, from which just 14 were selected for a full review that involved 131 transactions; and
• enforcement action that has been limited to 7 IFA firms and a number of related individuals.
Paragraph 1.11 of the 2010 report states : Although our sample of firms and files reviewed was small, the
fact that non-compliant promotion of UCIS were identified across all firms in the sample leads us to believe that
these results represent those firms that are promoting UCIS to their customers across the sector. APCIMS
considers this conclusion (together with the CP12/19 proposals which it supports), to be
altogether unreasonable. In particular, we would point to:
• the fact that the FSA’s sample was extremely small – only 14 IFA firms from a possible
universe of 3000 distributors, only 109 advised sales cases reviewed, only 24 cases that clearly
failed to demonstrate suitability of advice. While not wishing in any way to make light of the
egregious failings identified in the firms under review, we cannot concur that they provide a
sound basis for drawing conclusions about the activities of all other authorised firms active
in this market;
• the fact that the FSA appears to regard all firms who advise retail investors in relation to
UCIS as constituting a single homogeneous sector – we would contend that there is a
significant difference between a firm which provides one-off advice to a consumer to place
the bulk of their assets in a single UCIS without regard for suitability and a firm which has
assumed a long-term responsibility for advising an individual across a wide range of
investment holdings in accordance with that individual’s needs and circumstances. So far as
we can tell from the material referred to in Footnote 1 to Annex 2, the FSA’s work in
relation to UCIS has been confined to smaller firms within the IFA community and has not
extended to APCIMS-type firms who are likely to use investments falling within the NMPI
9
definition to create broadly-based investment portfolios for a more affluent and
knowledgeable client base.
In Chapter 4 of CP12/19, the FSA identifies a number of proposals that it is not taking forward
at this time, among them the introduction of a specific permission to promote or sell non-mainstream pooled
investments. As indicated in our covering letter, APCIMS believe that, rather than applying
promotional restrictions across all NMPIs and retail clients, it would be preferable to combine an
increased supervisory focus on the core customer care requirements currently existing in the
Handbook with enhanced controls in relation to record-keeping and reporting and use of the
limitation powers which the FSA has under the permissions regime. Such a combination of
measures would not only provide increased protection for consumers of the type who have
suffered the effects of poor advice received from the IFA firms covered by the FSA’s 2010
review but would also enable other retail clients and their investment advisers to continue to
have access to products that are widely considered to be extremely valuable portfolio
components.
Q2.
Are there any other investments that should be treated in the same way?
No.
Q3.
Are there any investments caught by the non-mainstream pooled investment
definition in the draft rules that you believe should not be?
We believe that paragraph (c) of the proposed NMPI definition (a security issued by a special purpose
vehicle) will capture a number of investment types, including some that are increasingly used to
provide retail clients with wider market access, that the FSA itself has indicated should be considered
when deciding which products are suitable for a retail client and for which (in the case of VCTs) the
Government has recently improved the tax conditions with a view to increasing the incentive for
people to invest in smaller companies.
The paragraph (c)(iii) exemption, which excludes certain SPV-issued securities from being
NMPIs, reads :
a security whereby the issuer’s payment obligations to the investor are linked to, contingent on, highly
sensitive to or dependent on, the performance of or changes in the value of shares or bonds admitted to or
dealt on a regulated market or on a market that is recognised as a market or exchange by an overseas
regulator, whether or not such performance or changes in value are measured with reference to specific
shares or bonds or via a market index or indices;
Because the exemption relies on the reference assets of an SPV-issued security being shares or
bonds traded on a regulated market or overseas equivalent, we believe that the NMPI definition
as currently drafted will capture both ETFs and ETCs providing access to currency and
commodity-based investment and VCTs providing access to smaller company investment. While
it is certainly true that such investments may not be appropriate for all investors, we believe that
the FSA’s proposal to limit access to these investments to sophisticated and high net worth
clients is unnecessarily restrictive and will – even allowing that some retail clients currently using
such instruments may possibly be re-categorised under the FPO exemptions – result in many
clients no longer being able to access investments which serve to diversify their portfolios, to
hedge other directly-held equity/bond exposures, to enable accurate tracking of benchmark
indices and to provide long-term havens against on-going stock market volatility (e.g. gold).
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In the case of exchange traded products, the FSA has previously indicated that advisers should
be taking them into account in providing advice to clients, whether under the current depolarised
regime as packaged products or under the new RDR regime as retail investment products. Under
the heading “The range of products an independent adviser should consider”, CP09/18 states :
to the extent that ETFs can be a cheap and transparent way to invest in a particular market, even under our
current whole of market requirement, these products should be considered when deciding which products are suitable
for a retail client. Initial indications from APCIMS firms are that ETFs are purchased for a wide
range of clients (execution-only, advisory and discretionary) as a liquid and cost-effective way of
gaining exposure to various commodities and indices and can form a significant proportion of
model portfolios where their use helps to reduce the overall costs of such offerings. CP12/19
does not provide any justification for the significant restrictions that the FSA’s proposals would
impose on this activity. Consequently, over and above our general proposal for how the
CP12/19 proposals should be re-shaped, we believe that consideration should be given • to including within any future NMPI or like definition a specific exemption for exchange
traded products. In the current draft definition, this could be achieved by extending the
paragraph (c)(iii) exemption to include ETFs that are themselves liquid securities investing in
assets which, even if not traded on a regulated market, are capable of being accurately and
consistently valued and are regularly traded on well-established markets; and
• to undertaking further research about how such products are used for retail investors, about
the impact of restricting client access to such products and about the detriment that may result
to existing investors if their advisers are constrained to advising them only on ongoing
suitability or disinvestment, as outlined in paragraph 5.3 of CP12/19.
While ETFs/ETCs are the variety of non-UCIS NMPI most frequently used by APCIMS firms,
we are aware of wider industry concerns about how the CP12/19 proposals may impact upon
VCTs, certain Enterprise Investment Scheme structures, private equity funds, Real Estate
Investment Trusts and the Common Investment Funds established for use by charities. The fact
that none of these vehicles is specifically referred to in the consultation paper indicates that the
FSA has not even recognised that its proposals could apply to them, let alone considered the
potentially significant impact those proposals might have upon the individuals who invest in
such products or the firms that advise on them. We believe that, in its eagerness to flex its
product intervention “muscles”, the FSA has allowed policy development to far outstrip the
evidential basis for action.
As regards what is included in the draft NMPI definition, we also believe that clarification is
needed as to:
• the position of non-UK UCITS that have not been recognised by the FSA – it appears to us
that many firms are not aware of the fact that UCITS established and authorised in other EEA
states may not be regulated collective investment schemes for the purposes of the FSA
Handbook. As a point of principle, we would suggest that regulation which results in some
UCITS being regarded as inferior to others for UK promotion purposes does little to support
European efforts to position UCITS as a reliable, global brand affording high levels of
investor protection. From a more practical perspective, it would be useful if the FSA could
confirm and explain that, as matters currently stand, non-UK UCITS are only regulated CIS
for the purpose of promotion to UK retail clients if they are recognised by the FSA under
section 264 of FSMA and that EEA-based UCITS which are not so recognised are in fact
unregulated CIS which would not only be subject to the CP12/19 proposals but are currently
subject to the existing COBS 4.12 and PCISO promotion restrictions.
• the position of UCITS ETFs – we assume that, where an ETF takes the legal form of a
UCITS and that UCITS is either authorised or recognised in the UK, such a product would
not be caught within the NMPI definition as currently drafted; we would welcome the FSA’s
confirmation of this point.
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Q4.
Do you agree that we should remove the general ability of firms to promote UCIS
under COBS 4.12.1R(4) category 1?
No. As per the comments in our covering letter, we believe that the COBS 4.12 UCIS provisions
should continue in their current form and that regulation of firms’ activity in relation to UCIS
(and a more carefully-defined field of close substitutes) should be supported by (a) targeted FSA
supervisory and enforcement activity aimed at ensuring that current standards are complied with
and (b) additional measures aimed at focussing firms’ attention on ensuring that such products
are used only when they are in clients’ best interests.
Q5.
Do you agree that firms should still be able to promote replacement UCIS to retail
customers where the original product is being replaced or liquidated?
As per our comments above, we believe that the COBS 4.12 UCIS provisions should continue in
their current form. If, however, the proposals in CP12/19 are made, we believe that firms must
have the right to advise clients on replacement products – any automatic assumption that
disinvestment is the only appropriate response may result in clients being disadvantaged if the
original investment was (and the replacement investment continues to be) in line with their
investment objectives and needs.
Q6.
Do you agree that we should remove the ability of firms to promote UCIS under
COBS 4.12.1R(4) category 2?
No. Please see our covering letter and our response to Q4 above.
Q7.
Do you agree that we should remove the exemption in COBS 4.12.1R(4) category
8?
No. Please see our covering letter and our response to Q4 above.
Q8.
Do you agree that we should limit the ability of firms to promote QIS, securities
issued by SPVs and TLPIs in the retail market?
To our knowledge, APCIMS member firms are not involved in promoting TLPIs or QIS to
retail clients and we consequently have no comments to offer in so far as the FSA’s proposals
impact upon these products. In relation to SPV-issued securities, please see the comments in
both our covering letter and in response to Q3 above.
Q9.
Do you have any comments or suggested improvements for our approach to SPVissued securities, including structured products?
Please see our response to Q3 above.
In addition, we would like to register our concern about the approach suggested in paragraph
3.28 of CP12/19 whereby, having instituted a general ban on promotion to retail investors of
structured products that fall within the NMPI definition, the FSA might nevertheless consider
case-by-case waivers for structured products that provide returns on indices other than stock markets (for
example house prices or inflation). In setting out the conditions that apply to waiver applications (i.e.
Firms requesting a waiver must be able to demonstrate that compliance with the rule would be unduly burdensome
12
or would not achieve the rule’s purpose; and anyone whose interests are protected by the rule would not be put at
undue risk), Footnote 24 highlights the fact that the FSA would effectively be judging individual
investment products against such criteria and determining whether they were appropriate for
promotion to retail investors generally. As well as querying whether the FSA has the detailed
investment knowledge and expertise to make such specific judgements, we would suggest that
such an approach comes uncomfortably close to the FSA approving individual products and is
likely to be seen by both investors and advisers as some form of product endorsement or general
indicator of security, suitability etc.
Q10.
Do you have any comments on the Handbook guidance we propose to add
regarding the use of exemptions in the FPO and PCIS Order?
As we have made clear, we believe that an increased focus on suitability and other high-level
client protections is the best way to address the risk of consumers receiving poor quality UCIS
advice. We query whether the process of categorising clients as sophisticated/high net worth in
order to access the FPO/PCISO exemptions may result in some firms taking a box-ticking
approach to advising on UCIS and close-substitutes (i.e. once an individual is so categorised,
they may be seen as a legitimate target for any proscribed product) rather than coming to a more
nuanced judgement as to the suitability of each and every investment in the light of each client’s
investment objectives and risk parameters. We assume that concerns of this sort are behind the
suitability–related guidance in draft COBS 4.12.7G to 4.12.9G. We also believe that just as the
FSA is right to conclude that the availability of an exemption permitting promotion does not mean the
product is suitable for a client, it is altogether wrong to suggest that the investments targeted by the
CP12/19 proposals will never be suitable for an investor for whom such an exemption cannot
be used. The division of the extremely wide-ranging retail investor market into
sophisticated/high net worth individuals on the one hand and ordinary retail investors on the other
is overly simplistic and will result in firms being unable to advise their clients in relation to
investments which they consider to be in their best interests.
Q11.
Do you agree that we should require firms to retain a record of the basis on which
the promotion of a non-mainstream pooled investment has taken place for each
financial promotion?
As per our covering letter and comments in response to Q1 above, we believe that, rather than
being used as a backstop to a regime which severely curtails the promotion of UCIS and other
products caught by the NMPI definition, the FSA’s financial promotion record-keeping
proposals (as set out in draft COBS 4.11.4R to 4.11.7R) should form part of an enhanced regime
of systems and controls supporting the continued promotion of such products in accordance
with existing client care obligations.
Q12.
Should we require confirmation of compliance with the marketing restriction for
each promotion?
See our comments in response to Q11 above.
Q13.
Do you agree that the CF10 individual is the correct person to confirm
compliance?
Firms have expressed a variety of concerns about the appropriateness of the FSA’s proposal,
including
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• whether it might be more appropriate for the record-keeping responsibility to sit with an
individual who not only fully understands the technical aspects of the investment in question
but who also leads the firm’s process for determining how such investments may be used for
clients (e.g. the Chief Investment Officer or the director responsible for the firm’s product
selection process);
• whether placing this requirement upon a firm’s CF10 will necessarily secure the independence
of outlook which the FSA is presumably seeking – it has been suggested that, in smaller firms
without a full-time compliance officer, the CF10 sign-off role may well be undertaken by
someone who is also engaged in promoting/advising on relevant investments in their capacity
as a CF30;
• whether it is sensible for a Handbook requirement that may require sign-off for significant
numbers of promotions/recommendations to be the responsibility of a single individual.
While overall responsibility for record-keeping might lie with the firm’s CF10, the FSA must
appreciate that it will not always be possible for that individual to personally undertake the
record-keeping task for each and every financial promotion. The fact that the firm’s CF10 is
absent or unavailable for whatever reason should not result in business being brought to a
halt. If record-keeping is to be a compliance responsibility, it should be capable of being
performed by any sufficiently experienced member of the firm’s compliance team, under the
overall authority/responsibility of the CF10.
Q14.
Do you have any comments on the Handbook guidance we propose to add
regarding the link between promotion and advice?
We agree with the basic principle that the provision of advice or information may involve the communication
of a financial promotion. However, we do not consider that it is necessary to add guidance to this
effect to COBS 9 given that PERG 8 already provides an adequate outline of what constitutes
the communication of a financial promotion for the purposes of section 21 of FSMA.
Q15.
Do you agree with our proposed update to the retail investment product
definition?
We do not believe that the proposed revision to the “retail investment product” definition will
be required if our headline concerns about the scope of the CP12/19 proposals, the vagueness
of the NMPI definition and the inappropriateness of the FPO/PCISO exemptions for the
purpose proposed are adequately addressed.
Q16.
Do you have any comments on the impact of our proposals on existing customers
and the distributor firms serving them?
Please see our covering letter and our response to Q1 above.
Q17.
Do you have any comments on our analysis of non-mainstream pooled
investments?
Q18.
Do you have any further data on the size of the market?
As we have already made clear, we do not believe that a review of 131 UCIS transactions
undertaken by 14 IFA firms provides a sound evidential basis for such a wide-ranging and highimpact set of proposals. We would also suggest that the fact that many of the investment
14
products potentially caught within the NMPI definition are not even mentioned in the
consultation paper, let alone covered by the FSA’s market and cost-benefit analyses, represents a
major flaw in the CP12/19 proposals. Before rushing ahead with finalised rules and guidance in
Q1 2013, the FSA must first establish and justify the impact of its proposals in relation to the
ETFs, ETCs, VCTs, CIFs and other products affected by, but not taken account of in, CP12/19.
In addition, it seems to us that many of the figures cited and statements made in the CP12/19
annexes are somewhat doubtful in terms of their reliability. Having been variously “estimated”,
“assumed”, “anticipated”, “calculated” and “scaled up” from bases that are not always made
clear, much of the data appears extremely speculative. To cite a few examples:
• of the 109 advised sales at the centre of the 2010 project findings, 26% were found to be
suitable, 22% unsuitable and 52% “unclear” on the basis that firms’ records for the transaction were
too poor or insufficient to establish suitability. While not denying that many firms need to do more
to evidence the grounds for/suitability of their UCIS investment advice, we do not
understand why the 52% of unclear cases have been automatically co-opted as supporting
the FSA’s general contention that UCIS/NMPIs are unsuitable for ordinary retail investors and
that the CP12/19 proposals will consequently improve customer outcomes for most retail
investors;
• the estimated number of UCIS distributors is put at between 1000 and 3000 – leaving to one
side the fact that the FSA has no clear idea of the number of firms likely to be impacted by
its proposals, it is alarming that the business of such large numbers of firms is under threat as
a result of supervisory work in relation to just 14 IFAs, a sample representing between 0.46%
and 1.4% of the number of firms potentially affected;
• the FSA admits that its ability to produce a comprehensive picture of the market in respect of the
“close substitutes” identified in CP12/19 is limited but nevertheless conjures up figures based
on a range of unsubstantiated assumptions, i.e. that there is a similar distribution pattern as for
UCIS, that most investors in these products are institutional and that only around 4% of investment is
made by retail investors;
• the FSA estimates total retail holdings in UCIS at £2.3bn and in QIS, SPVs and TLPIs
collectively at £1.5bn – these figures are then used as the base for subsequent estimates
about the potential benefits of the CP12/19 proposals without any attempt being made to
assess how much of the £3.8bn total is attributable to execution-only business (which is
expressly excluded from the CP12/19 proposals) or to discretionary activity (which is,
presumably, outside the scope of the proposals given that the CP fails to mention it at all);
• by replicating across all sales the conclusion that only 26% of UCIS sales are suitable (a conclusion
based on the suitability of just 109 advised sales cases), the FSA estimates that its proposals
will reduce the amount of unsuitable investment by between £680m and £2.3bn – this seems a huge
amount of supposed benefit to derive from such a small number of reviewed transactions,
especially since no account appears to have been taken of how these figures might be
impacted by the differences between the wider UCIS/NMPI market and the small number
of IFA firms under review (e.g. as regards the business/service offerings of the firms
involved, the types of clients involved and the purposes for which UCIS/NMPIs are used).
Finally, given the implication in CP12/19 that approximately three-quarters of all existing retail
UCIS holdings (i.e. £1.7bn) are either clearly unsuitable or so badly evidenced as to be “unclear”
as regards suitability, we expected that both the FOS and the FSCS would be planning for major
streams of UCIS-related complaints and claims in the future. Having met with both
organisations recently and asked them about their expectations in this area, we were surprised to
hear that neither had had in-depth discussions with the FSA on this issue and that UCIS barely
figured on their planning radars.
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Q19.
Do you have any comments on our overall strategy to deal with the risks to retail
customers of investing in UCIS?
Please see our covering letter and our response to Q1 above.
16