Styperson POPE

Strategy & Compliance for Investment Firms

Three routes to promote an Unregulated Collective Investment Scheme

The Financial Services and Markets Act (FSMA) imposes a restriction on unregulated collective investment schemes being marketed to the public but it also creates three sets of exemptions, each of which has its advantages and disadvantages…

1. The Financial Promotions Order defines how an unauthorised firm can promote a scheme using unapproved documents.  Essentially, it allows promotion to some institutional investors and to Certified Sophisticated Investors (and, depending on the scheme’s investments, occasionally to self-certified high net worth or sophisticated investors).

Advantages to this approach are that:

  • Fees tend to be lower because,
    • the document used does not need to meet the FSA’s requirements for financial promotions, and
    • no FSA authorised firm has to take responsibility for the document.

Disadvantages are that:

  • an unauthorised (and therefore probably less expert firm) takes all of the responsibility,
  • the documents do still need to meet certain FSMA and common law requirements,
  • schemes can only be promoted to institutional and certified sophisticated investors,
  • the person making the communication has to establish that the investor is certified before making any promotion, and
  • authorised firms (eg IFAs) may not be able to pass on the promotion.

2. The Promotion of Collective Investment Scheme (Exemptions) Order contains one of the sets of exemptions to Section 238 of FSMA which restricts how an authorised firm can promote a Collective Investment Scheme. The exemptions here are very similar (but not identical) to those under the Financial Promotions Order (above).
 

Advantages are that:

  • an authorised firm is involved, giving comfort to partners in the fund by taking on some of the responsibility;
  • investors will feel more comforted knowing that a UK-based, FSA-authorised body is involved in the communication; and

  • the document does not have to meet the full requirements of the FSA’s financial promotion rules;

  • an authorised firm can approve the promotion to be made by unauthorised persons (but there’s little point because the promotion would be limited to the same people the unauthorised person cold promote it to anyway under the Financial Promotions Order).

 Disadvantages are that:

  •  fees will be higher because the firm will have to ‘verify’ the contents of the promotional material – they have a responsibility to investors to ensure that it is fair clear and not misleading;
  • schemes can still only be promoted to institutions and certified sophisticated investors;

  • the person making the communication still has to establish that the investor is certified before making any promotion; and

  • even some authorised firms (eg IFAs) can not pass on the promotion – eg if it would constitute MiFID business for them.

3. The FSA’s rules provide the final route for promotion. These define eight categories of investor to whom a scheme can be promoted without breaching the restriction in FSMA. Some of these are very specific exemptions for unusual types of schemes (like Church Funds and Lloyds underwriters) but two in particular are of more use.
 

Advantages of utilising these rules are that:

  • the scheme can be promoted to other groups of investors, including

    • persons assessed as suitable by an authorised firm (probably their IFA),

    • persons who have undergone an adequate assessment of their knowledge, experience and expertise by an authorised firm;

  • the scheme can be promoted in such a way as to reduce as far as possible the risk of someone making an investment who does not fit an exemption (this will mean controlling the promotion, dissuading ineligible persons from applying, and checking that applicants are eligible but unlike the other routes above, this does not need to be done ahead of making initial contact with an investor);

  • an authorised firm will take responsibility for the document; and

  • an authorised firm can approve the document for distribution by unauthorised persons.

Disadvantages of this approach are that:

  • the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions;

  • fees will be higher because the document will need to be verified by the authorised firm; and

  • an authorised firm will need to have processes and procedures in place to ensure that ineligible applicants are not permitted to participate in the scheme.

As you can see, each approach has its ‘pros and cons’ and each route is therefore suitable for certain types of schemes.

Routes 1 and 2 are most suitable for institutional schemes (ie funds where all of the investors are investment professionals, authorised firms, or high net worth companies and unincorporated associations).

If you are thinking of pursuing either of these routes and the fund is looking for investment from individuals then make sure that you or your distribution network already know a good number of Certified Sophisticated Investors (be careful to ask the right question and get the right answer because Self-Certified Sophisticated Investors, probably won’t count and certificates that do not cover unregulated collective investment schemes are useless to you).

If in any doubt, we recommend that you pick a sample of your target audience, say 20 investors, and (without telling them anything about the fund), ask them if they have a certificate and if they do, to fax it over to you. We can take a quick look at these and make sure that they are the right kind. Once you know what percentage of your target audience has these certificates then you’ll know how restricted you’ll be in promoting your fund.

Route 3 is likely to be more expensive because the authorised firm (probably the operator of the scheme) is going to be more involved – they will verify the document (as indeed they will for route 2 and you will for route 1), they will ensure it meets the FSA’s higher standards, they will approve it for distribution by you, and they will have in place process and procedures designed to stop ineligible investors from participating.

On the other hand, this route will allow more effective promotion of the scheme on the basis that investors will be protected by the assessments carried out by authorised firms (be they the operator or an IFA). If you want to promote the scheme to individuals who don’t already hold a Certificate of Sophistication covering unregulated collective investment schemes, these protections will need to be in place.

Above, I said the fact that “the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions” was a disadvantage. It might equally be seen as an advantage, both for the investor, who is better informed and therefore better protected, and for the promoter who can draw the attention of their distribution network to the involvement of an authorised firm.

StypersonPOPE can help you to determine the most effective route to employ in promoting a scheme. If you would like to discuss scheme promotion, please do contact Simon Webber, StypersonPOPE’s Managing Director, either by telephone or e-mail.
 

 

 

 

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