FCA’s PS13/3: Retail investors unwelcome
Whatever our hazy recollections of the good old days, there never was a time when regulators were relaxed about the promotion of unregulated collective investment schemes. Twitchy might be the best description; paranoid might be another, but that would not be entirely fair. Damage has been done with CISs and it has usually been through the unregulated version. The industry is not beyond criticism, either for its management of the funds or for the way that they have been promoted. And the same can be said for animals that were not CISs, but looked remarkably like them. So it’s hard to say that this (FCA’s new rules published in PS13/3) is OTT. And even the dying breed that cleaves to caveat emptor will recognise that investors were significantly misled on numerous occasions.
But none of that quite explains the prominence that UCIS hold in the hierarchy of legislation. The banishment of the funds is enshrined in the Financial Services & Markets Act itself. Does that demonstrate high-level, even parliamentary, concern or is it just legal mechanics? Probably a bit of both, noting, of course, that financial promotion is not a regulated activity and is therefore open to the unwashed. But the impact has been striking. Once launched in legislation, the issue flows down into two Statutory Instruments and into the regulator’s Handbook too. And therein lies the problem.
Before producing its CP last August, FSA (as it then was) carried out extensive reviews of compliance across the industry and concluded that “these restrictions are widely misinterpreted, poorly understood and sometimes simply ignored…” There is a clear message in there, but it is a message for the regulators themselves: if you draft complex regulations and then spread them across four different pieces of legislation, you will lose your audience. Odd, that.
What does this say to you? Time to produce clearer, simpler, more intuitive rules? What does it say to the regulator? Time to change the policy! Actually, to be fair to the FCA, much of this lies beyond their control and there is evidence of an attempt to make the requirements a trifle more user-friendly. That is welcome, but it is not the whole story.
First we must acknowledge that one of the issues that have arisen in the recent past, with some pretty dire consequences for those who invested, was the emergence of carefully crafted investment vehicles that neatly avoided falling into the CIS definition. That put them outside the marketing restrictions and that is now being rectified. Not quite so clear-cut is the supposed removal of the scope to promote UCIS and their cousins, now collectively known as non-mainstream pooled investments or nompis to their friends, to retail investors. If this was supposed to deliver simplification which would lead to easier and more successful compliance, the new rules say otherwise. Where there used to be eight categories of person to whom UCIS could be promoted, we now have 13 categories to whom nompis can be promoted.
Bad as that looks, statistics are not everything. There is indeed a positive element to this extension of the list. What FCA has done, in its significant re-draft of its consultation version, is to bring within the rules a repetition of the scope already provided in the Statutory Instruments relating to high net worth individuals and certified and self-certified sophisticated investors. That is a marked improvement and is thankfully consistent with the regulator’s recent realisation of the need to incorporate the growing body of European Regulations, which apply willy nilly, into the Handbook.
But the main question remains: has the regulator taken the right approach to tackling the problem that it identified? If we believe that a good regulation is a simple one, a memorable one, one that self-evidently protects the right audience, it is hard to say that FCA has hit the nail on the head.
Oliver Lodge
June 2013
PS13/3 is the FCA’s recent Policy Statement on ‘Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes’. It provides the final rules, in force from 1st January 2014, following consultation in CP12/19.