Ashurst London
June 2013
Financial services regulatory briefing
Product intervention has landed:
UCIS and "close substitutes"
FCA has published final rules to ban the
marketing of Unregulated Collective
Investment Schemes (UCIS) and "close
substitutes" (now collectively known as
"non-mainstream pooled investments"
(NMPIs)) to "ordinary retail" investors in
the UK.
The rules will take effect from 1 January 2014.
However, now that firms are aware that FCA deems
these products inherently unsuitable for "ordinary
retail" investors, it will be difficult to justify not
implementing them sooner given firms' product
governance obligations to consider the needs and
wants of the target market when distributing retail
investment products. FCA has also warned that firms
The rules mark the boldest move by the regulator to
may want to comply with the rules sooner given the
date to address chronic failures in the assessment of
the suitability of such products for retail investors and
potential for unsuitable sales (and potential exposure
to misselling claims).
the lack of understanding by distributors of the
existing financial promotion rules.
Categorisation of "ordinary retail"
FCA has prescribed a definition of an "ordinary retail"
NMPIs

Unit in a UCIS;

Unit in a qualified investor scheme;

Security issued by a SPV (other than
"excluded securities" – see below);
investor, being any person who is not both (i) a "high
net worth individual" and (ii) a "sophisticated investor".
These are "investors of ordinary means and
experience who make up a large part of the retail
market in the UK."

Traded life policy investment;
This marks an interesting departure from the attitude

Rights to or interests in investments
that are listed above.
products whereby all retail clients are assumed equal
Excluded Securities

A "security" whereby the issuer's
payment obligations are predominantly
linked to the performance of or
changes in the value of shares,
debentures or government and public
securities (whether or not performance
is measured directly or via a market
index or indices and provided the
reference assets are not issued by a
SPV);

A covered bond;

A share in an "investment trust"
(including non-EEA equivalents);
of the regulator to date in relation to retail investment
for TCF purposes, regardless of wealth or
sophistication. It now seems possible that the same
distinction could be applied to other investment
products in relation to which firms may take the view
that they are too complex for "ordinary retail" but
could still be marketed to HNWI sophisticated
investors. This echoes the current trend of product
providers labelling certain products as only suitable for
a small category of retail investors and selecting
distribution channels accordingly.
Marketing of NMPIs
The existing rules in COBS 4.12 will be extended from
UCIS to all NMPIs.

A share in a VCT;
Currently, UCIS may be promoted to certain

A share in a REIT; and
customers which are detailed in COBS 4.12. FCA

An "exchange traded product".
intends to remove the following categories of customer
to whom firms may promote UCIS:
AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA
SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

existing investors (COBS 4.12.1R(4) category 1);
properly evaluate and understand the risks of a non-

advised investors (COBS 4.12.1R(4) category 2);
mainstream pooled investment which invests wholly or
and
predominantly in assets other than shares or in
debentures of unlisted companies.

investors who have the expertise, experience and
knowledge to be capable of making their own
investment decisions (COBS 4.12.1R(4) category
8).
The above (current) exemptions are often used in
practice where investors cannot display a great
amount of sophistication or experience.
(1) Certified high net worth investor
Must have signed a statement in the 12
months prior to the date of the promotion
confirming that at least one of the following
statements applies:

preceding the date of the promotion; or
to promote UCIS to people who are already
participants in a UCIS or who have been in the last 30
Annual income of £100,000 or more
throughout the financial year immediately
Category 1 in COBS 4.12.1R(4) currently allows firms

Net assets to the value of £250,000 or
more throughout the financial year
months. FCA intends to remove this exemption, by
immediately preceding the date of the
preventing the further promotion of UCIS on the basis
promotion (excludes primary residence,
of an existing investment that may have been
loans secured on primary residence,
unlawfully promoted and/or unsuitably recommended.
rights under qualifying contracts of
FCA has therefore proposed that in the future this
insurance and pensions).
category will be limited to where the NMPI being
promoted is intended to absorb or take over the assets
+
of the investor’s existing holding, or where the
investment is offered by the operator of the investor's
existing product as an alternative to cash on its
liquidation.
In order to rely on exemption applying to high net
worth sophisticated investors, a firm must obtain an
appropriate statement from the individual confirming
their status.
Firms also remain under a duty to treat customers
fairly and should therefore take reasonable steps to
(2) Self-certified sophisticated investor
Must have signed a statement in the 12
months prior to the date of the promotion
confirming that at least one of the following
statements applies:

business angels and has been for at least
six months prior to the date of the
promotion;

the date of the promotion;

professional capacity in the private equity
sector, or in the provision of finance for
ensure that the promotion of the NMPI to the high net
complex nature of the NMPI. Importantly, FCA
guidance will provide that "a retail client that meets
the criteria for a certified high net worth investor but
not for a certified sophisticated investor may be
unable to properly understand and evaluate the risks
of the NMPI in question" (see "Future product
intervention risk" below).
Firms wishing to rely on the self-certified sophisticated
investor exemption must take reasonable steps to
satisfy themselves that the investor does have the
requisite experience, knowledge or expertise to
understand the risks. FCA guidance provides that a
retail client who meets the criteria for the self-certified
sophisticated investor exemption but not for a certified
sophisticated investor exemption may be unable to
Works or has worked in the two years
prior to the date of the promotion in a
Firms will also be subject to an overriding obligation to
worth investor is fair, having regard to the generally
Made more than one investment in an
unlisted company in the two years prior to
ascertain that a retail client does in fact meet the high
net worth income and net assets criteria (see next
page).
Member of a network or syndicate of
SMEs; or

Is currently or has been in the two years
prior to the date of the promotion a
director of a company with an annual
turnover of at least £1 million.
= "High net worth sophisticated"
Where a firm signs off a client as a "certified
sophisticated investor" it must have regard to the
complex nature of non-mainstream pooled
investments and the level of experience, knowledge
and expertise of the retail client. A retail client whose
investment experience is limited to mainstream
investments (e.g. securities issued by listed companies
or units in regulated schemes) is unlikely to possess
the requisite knowledge to adequately understand the
risks associated with investing in NMPIs.
Records will need to be maintained specifying which
COBS 4.12 (and, if applicable PCIS Order) exemption
has been used and the basis for that decision
Certified sophisticated investor

A person in respect of who a regulated
firm has signed a statement in the three
years prior to the date of the promotion
confirming that he has been assessed as
sufficiently knowledgeable to understand
the risks associated with investing in
NMPIs; and

Who has signed a statement in the 12
months prior to the date of the promotion
declaring that they qualify as a certified
high net worth investor.
(including the reason why the firm is satisfied that the
relevant exemption applies). This will include
maintaining copies of any investor statement (signed
by the investor) or other disclosures required by the
exemption.
This enforces the regulator's powers when seeking to
hold individuals to account for the failings for firms.
Firms should expect these records to be checked
during FCA visits and in the context of section 166
reviews.
Impact on structured products
The direct impact of the final rules on the structured
products market will be less far-reaching than the
Advised sales
consultation originally proposed but products with
complex underlyers are at risk.
FCA has introduced new guidance in COBS 9 when
assessing suitability of NMPIs. This provides that
making a recommendation that a client should enter
Only products which take the form of a NMPI will be
caught.
into a NMPI will generally amount to a financial
promotion of that investment. Therefore, advisers
Structured products must not take the form of
cannot recommend NMPIs to "ordinary retail" investors
unless a valid exemption applies.
"securities issued by a SPV" unless the security falls
within the definition of an "excluded security".
"Excluded securities" include any shares, debentures,
In addition to the high net worth and sophisticated
warrants or notes issued by SPVs whereby the issuer's
investor exemptions, advice which is given following a
payment obligations are predominantly linked to the
specific request by a retail client for advice on the
performance of stocks or indices are explicitly
merits of investing in a NMPI will be exempt from the
excluded from the NMPI definition as long as the
reference assets themselves are not issued by an SPV.
ban as long as the client has not previously received
any marketing from the firm in relation to the NMPI.
Discretionary managed sales
The term "special purpose vehicle" is defined in the
FCA Handbook Glossary as a body corporate, explicitly
established for the purpose of securitising assets,
FCA recognises that the restriction on promotion
whose sole purpose (either generally or when acting in
outlined in this note will not apply to sales to
a particular capacity) is to carry out one or more of
the following functions:
discretionary managers, since such sales would be to a
"professional" investor. However, the new rules will
impact sales to discretionary managers who manage

issuing designated investments;
portfolios on behalf of "ordinary retail" clients since

redeeming or terminating or repurchasing
COBS 9 will contain guidance requiring the manager to
(whether with a view to re-issue or to cancellation)
take account of the FCA's views that NMPIs are not
an issue (in whole or part) of designated
suitable for "ordinary retail" before including such
products within such a client's portfolio.
Compliance sign off on promotions
investments, other than life policies;

entering into transactions or terminating
transactions involving designated investments in
connection with the issue, redemption, termination
or re-purchase of designated investments.
FCA requires persons holding the CF10 functions (or
their immediate reports) to sign off on the fact that
financial promotions of NMPIs are compliant with the
Businesses set up for commercial purposes, rather
than the securitisation of assets, would not be caught.
new rules. Where a CF10 delegates the sign off of
promotions, they must approve the process for signing
off promotions every 12 months.
However, structured product providers should heed
FCA's warning that products which are speculative,
illiquid or difficult to value accurately with investment
market's needs and wants. Even where the regulator
strategies and/or terms and conditions that are highly
has not taken industry-wide action against such
complex will continue to be the subject of potential
products, it can still ban a firm on an individual basis
regulatory intervention and must be looked at more
from marketing certain products where it has concerns
relating to a firm's product governance processes.
closely when assessing appropriateness for retail
investment in future. This means products which
provide exposure to anything more complex than
Even where a product falls outside the definition of a
stocks or indices, even when issued outside a SPV, will
NMPI, providers have an ongoing obligation to ensure
be under intense regulatory scrutiny and firms will
that the product is tailored to the needs and wants of
the target market to which it is distributed.
need to be able to justify why they deem any such
products suitable for "ordinary retail".
Likewise, the ability to promote a NMPI to certain
Future product intervention risk
categories of retail investors does not absolve a
product provider of its obligation to ensure that the
Firms should continue to expect developments in this
product is suitable for that narrow target market of
area and FCA has warned that this will not be the final
investors to whom it is promoted based on the
identified needs of that market.
consultation on NMPIs. A consultation introducing
marketing restrictions for other products which are not
pooled investments, impacting contingent convertibles
Finally, providers must be aware of and take steps to
(CoCos) and building society deferred shares is also
limit the risk that secondary market sales result in
planned. In any event, it is important to remember
that the FCA has temporary product intervention
products ending up in the hands of "ordinary retail"
investors for whom they are not suitable.
powers, enabling it to ban products at any time
without consulting on such a ban.
Flowchart
FCA has warned product providers that they must
Please see the attached flowchart (taken from the
remain aware of the importance of their role in helping
FCA's policy statement) which summarises the
to ensure good consumer outcomes. This involves
assessment approach when considering whether a
product is caught by the new rules.
designing and distributing products which are suitable
for the target market and which tie in with the target
This flow diagram shows whether a NMPI marketing restriction applies
to a promotion:
1
Is the client a retail client?
No
The marketing restrictions in COBS 4.12.3R does
not apply to promotions to clients who are eligible
counterparties or professional clients (either per se
or elective). Exemption 7 in COBS 4.12.4R(5) also
exempts promotions of UCIS in relation to nonretail customers
No
Product is non-mainstream pooled investment
(NMPI) and not subject to the marketing
restrictions.
Yes
2
Is the product an unregulated collective investment
scheme (UCIS), qualified investor scheme (QIS),
traded life policy investment (TLP) or a special
purpose vehicle (SPV)?
If the product is a UCIS, QIS or TLPI go to Q5,
if it is an SPV go to Q3
3
If the product is a fund structured as an SPV, is it
one of the following excluded products?
 an investment trust or an overseas investment
company that would meet the criteria for
investment trust status if based in the UK?
 a real estate investment trust?
 a venture capital trust?
 an exchange traded product?
 a trading company?
Product is not a NMPI and not subject to the NMPI
marketing restrictions.
Yes
No
4
If the product is a fund structured as an SPV and is
not excluded (see above), what kinds of assets are
being pooled inside the SPV or otherwise used to
calculate returns to investors? (Select one of A or
B.)
A. Primarily shares and/or bonds
Product is not a NMPI and not subject to the NMPI
marketing restrictions. Only the marketing of SPVs
exposing investors to the risks of speculative or
exotic assets is restricted.
B. Primarily assets that are neither shares nor
bonds (e.g. complex financial instruments,
commodities, tangible or luxury goods,
interests in agricultural or forestry projects,
etc)
Product is a NMPI and promotion to retail investors
is only permitted if an exemption is available. Go to
Q5 below.
No
5
Is the firm making a communication that invites or
induces investment in the NMPI
Yes
The marketing restrictions only apply to
promotions.
Yes
6
Does the client have EITHER an annual income of
£100,000 or more, OR net investable assets
(EXCLUDING the value of the client's home, any
loans secured on it, pension funds and any benefits
under insurance policies) of £250,000 or more?
Yes
1. Firm can promote a restricted range of UCIS to
the client under article 21 PCIS Order if the
client has the relevant certificate and subject to
the requirements of this statutory exemption;
OR
2. Firm can promote a restricted range of other
NMPI's to the client under article 48 FPO if the
client has the relevant certificate and subject to
the requirements of this statutory exemption;
OR
3. Firm can promote any NMPI to the client under
COBS 4.12.4R(5) exemption 2, provided the
firm believes that NMPI is likely to be suitable
for the client and subject to the certification
and warnings required by COBS 4.12.6R. See
COBS 4.12.5G for guidance on the preliminary
assessment of suitability required by this
exemption.
See also the guidance on promotion to high net
work investors provided in COBS 4.12.9G. Firms
should ensure promotion under any exemption is
fair and in the client's best interest.
No
7
Is the client a self-certified sophisticated investor
who the firm believes meets one of the following
criteria?
 they are a member of a network or syndicate of
business angels?
 they have made more than one (direct)
investment in an unlisted company in the last
two years?
 they are working, or have worked in the last
two years, in a professional capacity in the
private equity sector, or in the provision of
finance to small and medium enterprises?
 they are currently, or have been within two
years, a director of a company with an annual
turnover of at least £1 million?
Yes
1. Firm can promote a restricted range of UCIS to
the client under article 23A PCIS Order if the
client has the relevant certificate and subject to
the requirements of this statutory exemption;
OR
2. Firm can promote restricted range of other
products to the client under article 50A FPO if
the client has the relevant certificate and
subject to the requirements of this statutory
exemption; OR
3. Firm can promote any NMPI to the client under
COBS 4.12.4R(5) exemption 9, provided the
firm believes that NMPI is likely to be suitable
for that client and subject to the certification
and warnings required by COBS 4.12.8R. See
COBS 4.12.5G for guidance on the preliminary
assessment of suitability required by this
exemption.
See also the guidance on promotion to self-certified
sophisticated investors provided in COBS 4.12.11G.
Firms should ensure promotion under any
exemption is fair and in the client's best interests.
No
8
Has the client been assessed and certified by the
firm or by another authorised person as a
sophisticated investor?
No
Yes
1. Firm can promote any UCIS to the client under
article 23 PCIS Order, if the client has the
relevant certificate and subject to the
requirements of this statutory exemption; OR
2. Firm can promote other products that are in
the best interests of the customer to the client
under article 50 FPO, if the client has the
relevant certificate subject to the requirements
of this statutory exemption; or
3. Firm can promote any NMPI under COBS
4.12.4R(5) exemption 8.
See also the guidance on promotion to certified
sophisticated investors provided in COBS 4.12.10G.
Firms should ensure promotion under any
exemption is fair and in the client's best interests.
9
Is the NMPI in question being offered by the fund
manager as a replacement product to an existing
NMPI which is being wound down or liquidated?
Yes
Firm can promote details on the restructure or
replacement to clients of the existing NMPI under
COBS 4.12.4R(5) exemption 1. This exemption also
permits promotion of an NMPI's rights issue to
existing investors.
Yes
Subject to the requirements of exemption 10 in
COBS 4.12.4R(5), firm can provide solicited advice
to the client even if it would amount to a financial
promotion in relation to that specific NMPI.
Yes
Firm can promote the product to the client under
COBS 4.12.4R(5) exemption 12, provided the firm
believes the product is likely to be suitable for that
client and subject to provision of product
information as would be required under COBS 14.2
in relation to a recognised scheme. See COBS
4.12.5 G for guidance on the preliminary
assessment of suitability required by this
exemption.
Yes
Firm can promote the product to clients who are
US persons under US tax law under COBS
4.12.4R(5) exemption 13.
Yes
Firm can promote the product as part of the client's
remuneration package under COBS 4.12.4R(5)
exemption 4.
Yes
Promotion permitted subject to compliance with
the conditions of the exemption.
No
10
Has the client, acting on their own initiative and
without previously received a promotional
communication from the firm or a connected
person, requested advice on whether they should
invest in a specific NMPI?
No
11
Is the product a non-UK UCITS fund that has not
been recognised in the UK?
No
12
Is the product a US mutual fund that has not been
recognised in the UK?
No
13
Is the client an employee of the NMPI?
No
14
Does any other exemption provided under the PCIS
Order (for UCIS only), the FPO or COBS 4.12.4R(5)
apply to promotion of the NMPI to the client in
question?
No
Promotion of the NMPI is not permitted
Key contacts
James Perry
Partner, London
Rob Moulton
Partner, London
T: +44 (0)20 7859 1214
E: [email protected]
T: +44 (0)20 7859 1029
Michael Logie
Partner, London
Nicola Higgs
Senior associate, London
T: +44 (0)20 7859 2489
E: [email protected]
T: +44 (0)20 7859 1033
E: [email protected]
Jake Green
Senior associate, London
T: +44 (0)20 7859 1034
E: [email protected]
E: [email protected]
Abu Dhabi
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Al Bateen Towers
Bainunah (34th) Street
Al Bateen
PO Box 93529
Abu Dhabi
United Arab Emirates
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OpernTurm
Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
Germany
Melbourne
Level 26
181 William Street
Melbourne VIC 3000
Australia
T: +49 (0)69 97 11 26
F: +49 (0)69 97 20 52 20
T: +61 3 9679 3000
F: +61 3 9679 3111
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Hong Kong
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Central
Hong Kong
Milan
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20123 Milan
Italy
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Adelaide SA 5000
Australia
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F: +61 8 8112 1099
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Towers
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Beijing
PRC
T: +86 10 5936 2800
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T: +852 2846 8989
F: +852 2868 0898
Jakarta (Associated Office)
Oentoeng Suria & Partners
Level 37, Equity Tower
Sudirman Central
Business District
Jl. Jend. Sudirman Kav. 52-53
Jakarta Selatan 12190
Indonesia
T: +62 21 2996 9200
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Brisbane QLD 4000
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Belgium
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Financial Centre
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Dubai
United Arab Emirates
T: +39 02 854231
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Munich
Ludwigpalais
Ludwigstraße 8
80539 Munich
Germany
T: +49 (0)89 24 44 21 100
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New York
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USA
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Paris
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Italy
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Financial Centre Tower 3
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T: +65 6221 2214
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Sweden
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Sydney
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Australia
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Tokyo
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USA
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F: +1 202 912 8050
T: +971 (0)4 365 2000
F: +971 (0)4 365 2050
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© Ashurst LLP 2013 Ref:29301897 7 June 2013