UCIS: FSA clamps down on exotic investments

GrapesThe regulator wants to limit the number of people able to invest in exotic investments like wine or stamps.

Anyone would think I had a limitless pool of cash to throw away judging by the number of phone calls and emails I get offering me dodgy investments.

If it's not land in Liberia, it's teak in Thailand. If it's not fine wines, then it's fine art. And those are only scratching the surface. There's stamps, gold, rare earth metals, carbon credits, student flats, even burial plots (cemeteries are filling up fast).%VIRTUAL-SkimlinksPromo%
What unites all these is that there is always a credible supply and demand story. The supply is limited but the demand is apparently infinite.

Take wine. The Chinese will only drink the most expensive vintages.

There are over a billion people in China. But great wines are few and far between. So you don't need more than Grade C at GCSE Economics to know that putting those two sides of the equation together means prices just have to rise, rise and rise. Making money has never been so easy.

There's only a few problems with the firms offering these investments.

Either the asset itself does not exist. Or it is grossly overpriced.

And the people selling me this only know as much about what they want me to buy as it says on their prompt cards. What's not on their script is that once they've ripped off enough investors, their firm will evaporate into the night, taking all the cash that's not already been spent on champagne and cocaine with it.

But – and this may surprise you as much as it did me – there are legitimate financial advisers out there selling stamps, timber, land, part-used life insurances, wine, and hotel rooms. The Financial Services Authority (FSA) has no sway over these investments or the way in which they are sold – often for individual retirement schemes such as Self Invested Personal Pensions.

Goodbye to UCIS
Still, because it's your friendly IFA who recommends these, they come with credibility. People who would never buy from cold-calling scam merchants will put these assets into their pension plans, all because the adviser they trust says it is a good idea. Sellers stress "non-correlation" - that assets such as gold or teak or oil don't go up and down in the same way as stocks and shares. They have their own independent life.

Because these unregulated investments come from a regulated person, they have a grandiose title. They are called Unregulated Collective Investment Schemes (UCIS). Currently advisers, who can earn big commission on such investments, assess the "suitability" of any deal.

But now after years of complaints and problems the FSA wants to ban their sale to most investors.

What is a sophisticated investor?
Under an FSA proposal which is almost bound to enter the rulebook, the sale of UCIS will only be allowed to "sophisticated investors", including those who are so rich they won't notice the loss of the odd £50,000 or £100,000. Finding a definition of "sophisticated investor" is hard. Some are certified and some self-certified.

The FSA defines one as "retail clients with extensive investment experience and knowledge, who are better able to understand the risks of complex and unusual investments". This is not much of a test – most of us would like to claim this degree of comprehension. After all, 90% of drivers think they have better than average driving skills. And I am sure a commission-induced adviser could persuade people that they are "sophisticated". Who wants to be thought "simple"?

The rich person is easier to define – someone with £250,000 in assets or £100,000 a year income.

Easy to buy, but impossible to sell
Nevertheless, the fact the FSA has produced a 92 page long paper on UCIS should be warning enough. Whether you are sophisticated or not, just how sophisticated is your financial adviser?

How many of the many unregulated investment categories I've already mentioned can anyone really understand?

What's wrong with all these strange UCIS deals is that they are easy to buy but often impossible to sell. To use the jargon, they are "illiquid" (and that includes wine!).

They may be impossible to value. Property in Mexico, for instance, does not come with the same degree of pricing accuracy as property in Manchester (and that's not 100% either). Sometimes – like jojoba plantations in the jungle - it can be difficult to even find the investment.

Those exotic assets can be subject to huge falls in worth. And let's not forget all the hidden charges built into these products such as insurance and huge mark-ups – many stamps could only be sold tomorrow for half of what you paid today.

So if the FSA says all bar the sophisticated and the super-rich should be banned from buying these from regulated advisers, just how much more does the warning apply to the self-same assets when sold by a spiv on the end of a phone line from a here today and gone tomorrow company you've never heard of?

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