Styperson POPE

Strategy & Compliance for Investment Firms


How are Funeral Plan Providers Regulated?

One relatively unknown corner of legislation is how providers of funeral plans are regulated under the financial services and markets act (FSMA)…

From a regulatory point of view, there are three types of provider:

1. FSA Authorised Providers
Because of the ready availability of exemptions to the Regulated Activities Order (RAO) which defines the requirement for FSA authorisation, no funeral plan providers have opted for full regulation.  Nonetheless, the starting point for the exemptions is the regulated activity of…

”Entering as provider into a funeral plan contract… under which a person (“the customer”) makes one or more payments to another person (“the provider”); and the provider undertakes to provide, or secure that another person provides, a funeral in the United Kingdom for the customer (or some other person who is living at the date when the contract is entered into) on his death”

2. Plans Secured Against a Contract of Insurance
If the money paid by the customer is used to purchase insurance cover which provides for funeral expenses, the provider of this product is exempt from requiring authorisation as a funeral provider (however, they may well require authorisation as an insurance intermediary).

3. Plans Which Hold Money in Trust
These are by far the most common type of funeral plan but they are also have the most complicated exemption for their providers to avoid having to be FSA authorised.  There are five separate tests which must each be met for the use of this exemption.  They cover:

i) the form of the trust;
ii) the eligibility of the trustees;
iii) the management of the trust’s funds;
iv) the accounting for the trust; and
v) the valuation of the trust.

Providers will also need to consider the Money Laundering Regulations as they apply to trusts and trust and company service providers.

If you’re a provider of funeral plans and would like to ensure you manage your activities to fit within one of these exemptions, do please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.

If you’re interested in purchasing a funeral plan, this post probably hasn’t been very helpful, but you might want to read this advice from the FSA.


Structuring Funds: Unregulated Collective Investment Schemes

This isn’t intended to be comprehensive but it hopefully introduces some of the terminology for those who are unfamiliar.  Most fund vehicle types link to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!  They may also have a carried interest vehicle which provides them with a tax-effective way to benefit from the success of the fund.

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme unless they qualify as Open Ended Investment Companies – OEICs) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will work out less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units and would usually require the assistance of professionals adding further costs.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may be used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest.

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.


Who needs to be FSA Authorised?

As is so often the case with regulation, it’s almost impossible to get an answer to a simple question like this without ending up being barraged by unhelpful and unfamiliar technical terms.  With respect to investment firms like our clients, the answer is easy:

“If, in the course of business, you carry out designated investment business with respect to specified investments and the activity isn’t excluded, or you’re not exempt, you need to be authorised.” 

But really, what use is that?!

The rules genuinely are detailed and complicated, and the terminology is technical so this can’t be a full guide but we can unpack the ‘easy answer’ above, separate out the different concepts and give a quick introduction to them so that you know what questions to ask next…

1) in the course of business
This part of the answer is not clearly defined by law but most people know whether they are doing something in the course of business or not.  If it could make you money (whether or not it actually does) and if it’s a regular activity rather than a one-off happening, it’s likely to fall within “the course of business”.

2) designated investment business
This is just a part of the much wider “regulated activities” which range from insurance business to banking but these are the ones undertaken by most investment firms.  These include (among others):

Again, common sense applies; if it feels like it should be regulated, it probably is.

3) specified investments
These are the investment instruments that are regulated.  This category includes shares, options, warrants, debentures, units in a collective investment scheme (fund), government securities, &c..

There are several popular alternative asset classes that aren’t specified investments, most notably property (real estate) but also art, wine, stamps, antiques, and the like.  You do not, therefore, need to be regulated in order to advise someone on their portfolio of wines. 

Even within these asset classes, some caution is required; because units and shares are specified investments, advising somebody to buy into an art fund, or to buy a special purpose vehicle which owns a building, is likely to be regulated.

4) excluded activity
These are activites which, were it not for the specific exemption, would require you to be authorised.  They include publishing media reports on financial matters, setting up employee share schemes, and buying or selling investments on your own behalf (as long as you don’t hold yourself out to the market as willing to do so).

5) exempt persons
Finally, these are people who have specific exemptions from requiring FSA authorisation because of who they are.  These include regulated professional firms (mainly lawyers and accountants, where the activity is incidental to the professional services they offer), appointed representatives, central banks, and certain large investment exchanges.  If you were going to fall into this category, you’d probably know already.

If you’re not sure whether you need to be authorised, it’s likely to be because you’re not sure if the activity you’re undertaking counts as ‘regulated activity’ or if you’re involved with ‘specified investments’ (2 & 3 above).  These are the key areas where you may want to seek more advice.

Of course, if you’d like to discuss with us, whether or not you need regulation, please contact Simon Webber, StypersonPOPE’s MD, either by telephone or on sw@strategic-compliance.co.uk.


FSA Client Categories

Client categorisation is an area where many people (including FSA authorised firms) are still confused.  To be fair to them, it has changed a few times and there are several complications and clashing concepts. 

For instance, it’s common to confuse concepts like ‘High Net Worth Individual‘ and ‘Sophisticated Investor‘ with client categorisation as retail, professional or eligible counterparty.  In fact they are nothing to do with one another – many investors are both High Net Worth and Sophisticated but still retail investors.

Client categorisation is particularly important when an authorised firm does not have the permissions to deal with retail investors.  If client categorisation isn’t handled properly, the firm can end up on the wrong side of the law.

All authorised firms must categorise their clients, so to start at the beginning; who is the client?  A client is any person to whom the firm provides, or may potentially provide,  a service in the course of carrying out a regulated activity.  Even if services aren’t provided to them, a person to whom a firm communicates, or for whom a firm approves, a financial promotion is also a client (but a different kind of client and slightly different rules apply).

How a client is initially categorised depends on what sort of entity they are.  Starting at the top and working down…

Eligible counterparties include investment firms, insurance companies, authorised collective investment schemes, pension funds, governments, central banks and supranational institutions (like the World Bank and IMF). 

Professional clients include many of these same entities because eligible counterparties are only counted as such in respect of eligible counterparty business, the rest of the time, they are professional clients.  This category also includes large businesses (how large depends on the services provided), trusts with asssets of more than €10m, and pension funds with more than 50 members.

Retail clients are everybody else – most SMEs and all individuals will be retail clients.

However, a retail client can ask to be treated as an ‘elective’ professional client.  This means that they will be less well protected by the FSA’s rules and so authorised firms are required to ensure that such people qualify to make the change.  The criteria for that qualification again depend on what kind of service is being provided.

For non-MiFID business,  the firm must assess the expertise, experience and knowledge of the client to ensure that they are capable of making investment decisions and understanding the risks involved.  Firms must have in place procedures and training to ensure such an assessment is adequate and must keep appropriate records.  There must also be an exchange of correspondence between the client and the firm in order to effect the change.

For MiFID business, as well as the above, the client must be able to satisfy two of the following quantitative tests:

  • they have carried out an average of 40 significant transactions on the relevant market in the last year;
  • they have a cash and financial instrument portfolio of over €500,000;
  • they have worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services envisaged.

For many types of regulated activity, the first of these quantitative tests is highly unlikely to be met by even the most active investor.  If so, for an authorised firm carrying out MiFID business that does not have permission to take on retail clients, the only individuals they can work with are essentially financial services professionals with portfolios over €500,000… and there just aren’t as many hedge fund managers as there once were!

Retail clients who choose to recategorise as professional always have the right to return to being retail clients.  Indeed, all professional clients and eligible counterparties have the right to downgrade their categorisations and increase their potections.

As well as in relation to the provision of regulated services, client categorisation is important to financial promotions where communications which are likely to be received by retail clients must meet higher standards than others.   If a promotion is approved so that it can be circulated by unauthorised firms, the approval must be limited to the client categories for which it is written.  It is an offence under FSMA for a communication approved for professional clients to be distributed to retail clients.

If you are at all unclear about client categorisation, StypersonPOPEcan prepare a clear and straightforward procedure for you to follow.  Please contact Simon Webber for an initial discussion on 07710 260 717 or sw@strategic-compliance.co.uk.   


Three Routes to Promote a UCIS

The Financial Services and Markets Act (FSMA) imposes a restriction on unregulated collective investment schemes (UCIS) 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 UCIS using unapproved documents.  Essentially, it allows promotion to some institutional investors and to Certified Sophisticated Investors (and, depending on the scheme’s investments, also 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 UCIS. 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 that the unauthorised person could 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 UCIS 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 an institutional UCIS (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 units in a UCIS 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.
 

 

 

 


Quick Guide to The Structure of a Fund

This isn’t intended to be comprehensive (if it was, it would be better written by a lawyer and a tax accountant) but it hopefully introduces some of the terminology for those who are unfamiliar. Most links lead to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will probably be less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest. 

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE‘s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.


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.