What is an Unregulated Investment?
Unregulated investments, also known as unregulated collective investment schemes (UCIS) are very high-risk financial products unsuitable for sale to retail clients. Although “unregulated” they must be registered and approved by the FCA. They can then only be sold by regulated persons to self-certified high-risk investors. However, this has rarely been enforced and the sale of unregulated products to anyone willing to buy them has and remains prolific.
Claims are made against IFA’s for promoting, arranging or transacting unregulated investment schemes involving or not involving a regulated product such as a SIPP or mortgage. Unregulated investment schemes cover a wide range of investments, however the focus has been and remains with off-plan property schemes given their abundance.
Obligations of an Adviser of Sales Person for Sales of Unregulated Investments
Selling investments in the UK is regulated by the Financial Services and Markets Act 2000. This means that all regulated and unregulated persons/firms must follow a strictly prescribed set of rules controlled and regulated by the Financial Conduct Authority. Prospective customers must be assessed as suitable to enter into an agreement to buy an unregulated investment regardless of their desire to do so. Even self-certified high-risk investors had to understand the risks involved including that an investment product was approved by the FCA for sale. Selling an unregulated investment scheme by other than a regulated person is a criminal act.
Under the Labour government of the late 1980s, buy-to-let investments were deregulated to encourage the sale and raising of mortgages to pay for them. The reason for this is because it was seen that pensions would be inadequate for the ageing population and self-investment was believed to be a good answer to acquiring wealth for retirement. This meant that financial advisers could sell BTLs and mortgages required to finance them, at the same time.
However, due to the inadequate housing stock available to purchase, IFAs worked with developers to sell off-plan properties as BTL investments and a red line had been crossed. Off-plan properties could not be sold as investments to retail clients because of the risks inherent if the builder became bankrupt or the properties were unsuitable for habitation.
And if off-plan property BTL investing was unsuitable to be sold to retail clients, offshore off-plan properties were even more high-risk. We now know that many thousands of off-plan offshore properties were sold to UK residents during the 2000s of which extremely few have fulfilled the returns on investment if built at all.
Some Key Obligations
- A firm must ensure that only regulated investments that are suitable for retail clients are sold to them.
- Unregulated investment products must be registered and approved for sale by the FCA and only to self-certified high-risk investors.
- Even approved unregulated investments must have the risks explained in writing.
- Off-plan property investing cannot be approved for retail clients to buy, especially using unregulated mortgages or pension transfers.
- Offshore off-plan property is seen as totally unsuitable for retail clients.
How was this service mis-sold?
The incentive to generate commissions above and beyond what could be achieved by selling standard savings and investment products is always considerable. Encouragement by government for individuals to take greater control of their retirement funds was a serendipitous factor that encouraged financial advisers to sell buy-to-let property with unregulated mortgages. It was an easy decision to step into the world of unregulated investment property with off-plan developments.
Here are some of the main reasons why the regulator believes that retail clients should not have been sold unregulated (collective) investment schemes:
- Off-plan property requires a degree of risk that retail clients do not understand
- If an off-plan property does not complete the investor will lose his deposit and be discouraged from further investment
- Offshore off-plan investment property compounds the risk of a successful payout to finance any retirement strategy
- Unregulated investments should only be sold by regulated persons to high-risk investors because they understand investment risk and probably have the means to withstand losses
Redress for mis-sold unregulated investments requires a claimant to be returned to the financial position they would have been in if they had not invested. However, the FSCS will only compensate up to a £50,000 statutory limit. Although statutory interest should be applied, the upper payout limit is so low that it is easily exceeded.
Compensation through the Financial Ombudsman Service has a limit of £150,000 but the defending financial adviser must still be in business. The FOS has a very bad track record in understanding and upholding such claims, which makes this approach unreliable. Legal action is a possibility, but the difficulty is to get a solicitor to take a case on as a conditional fee agreement and obtain the necessary insurance protection to overcome the risk of adverse costs if the case is lost.