The main UK regulator of investments, their providers and their promotion is the Financial Conduct Authority (FCA) under the Financial Services and Markets Act (FSMA). Many alternative investments however are unregulated, although the promotion and selling of them will often be a regulated activity.
As most alternative investments are unregulated, if anything goes wrong the investors are unlikely to be able to take any complaints to the Financial Ombudsman Service or have any recourse to compensation through the Financial Services Compensation Scheme. More information can be found on the consumer information section of the FCA’s website.
promotion of investments
There are a number of restrictions on the types of investor that certain investments can be promoted to. Specifically unregulated collective investment schemes and other non-mainstream pooled investments cannot be promoted to retail clients, unless they meet one of the exemptions in the Conduct of Business Sourcebook (COBS) 4.12.4R.
Similarly firms must ensure that any direct offer promotions (where the promotion specifies the manner of response or includes a form by which a response can be made) they produce for non-readily realisable securities are not likely to be received by retail clients, unless the retail clients meet one of the exemptions in COBS 4.7.7R.
This is because these investments can be more complex, illiquid or more likely to be riskier than other, regulated investments as well as not being covered by the Financial Services Compensation Scheme.
In the event of a dispute between the FCA and the investment operator, it is the courts that will decide whether or not an investment is or is not a UCIS, NMPI or NRRS.
unregulated collective investment scheme (UCIS)
A UCIS is a collective investment scheme (CIS) that is not a regulated fund. A CIS is where the investor is able to ‘participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income’ and:
- the participants do not have day to day control over the management of the property; and,
- the contributions of the participants and the profits or the income out of which payments are made to them are pooled; or
- the property is managed as a whole by or on behalf of the operator of the scheme.
The definition of a CIS is wide and a number of structures used for alternative investments would be included. Accordingly care is needed when promoting any investment where more than one person is going to participate in the investment.
Certain legal structures are excluded from the definition – e.g. shares issued by companies other than an Open Ended Investment Company (OEIC) or linked life insurance policies.
What is or is not a collective investment scheme is not easy to decide and legal advice is often needed. Indeed the FCA is taking action against firms promoting certain investments where the FCA believes that the investment is a collective investment scheme. Indeed in the case of the Financial Conduct Authority v Capital Alternatives & Others  EWHC 144 (Ch) (14 February 2014) the courts agreed with the FCA that two investments (one in rice farm harvests and the other in carbon credits) were collective investment schemes.
non-mainstream pooled investment (NMPI)
An NMPI is basically any one of:
- a unit in a UCIS (see above)
- a unit in a qualified investor scheme
- a security issued by a special purpose vehicle, other than an excluded security
- a traded life policy investment
Therefore even if an investment is not caught as a UCIS it may still be caught under one of the other types of investment.
non-readily realisable securities (NRRS)
In addition to the marketing restrictions around NMPIs, which includes UCIS, care is needed where investment into a non-readily realisable security that is not an NMPI is being promoted. NRRS can only be promoted to sophisticated investors, high net worth investors and restricted investors. Restricted investors are retail investors that have signed to confirm that in any one year they have not and will not invest more than 10% of their net assets in non-readily realisable investments.
A non-readily realisable security is any security that is not
- a government or public security
- admitted to official listing on an exchange in an EEA State
- regularly traded on or under such an exchange
- regularly traded on or under rules of a recognised investment exchange
- a non-mainstream pooled investment