For many introducers, advisors and agents, alternative investments are an appealing addition to their product portfolio, but they may be nervous about falling foul of the Financial Services Authority. Daniel Kiernan outlines some of the key issues in this article published in FT Adviser.
How are alternative investments regulated? Maybe you have thought about adding alternatives to your product mix but are wary of the regulatory issues? Or you might have read about some of the heavy fines imposed by the FSA on agents promoting unregulated collective investment schemes and are naturally keen to avoid making the same mistakes. Perhaps you are an IFA who is looking for a way to replace lost commission revenue, but you are unclear on the rules?
There are three key ways alternative investments can be held:
i) Conventional regulated structures
Some alternatives – particularly commodities – can be held in a conventional structure such as an exchange-traded fund, an open-ended investment company, a unit trust or a managed fund. These are the sorts of products that IFAs are familiar with and comfortable recommending. They are put together by big institutions, have large marketing budgets and a lot of supporting literature and go through very thorough due diligence as they are regulated by the FSA.
The promotion and sale of these products is a regulated activity and after the retail distribution review rule changes come into force at the end of 2012 advisers will no longer be able to earn commission on the sale of any regulated retail investment products.
ii) Directly held, non-regulated investments
Alternatives can also be held directly. If there is no structure around the investment then it is very similar to a property purchase. Investments such as gold bars, land, classic cars, fine wine or coins fall into this category. Just like property purchases, the promotion and sale of these products is not a regulated activity and product providers will be able to continue to pay commissions to sales people post-RDR.
This is the sector that many property agents and mortgage brokers are keen to exploit as property transactions have fallen away. Many IFAs are also moving into this area to either replace lost commission income, or because they are choosing to let their regulated status lapse after the RDR but do not want to lose the value in their hard earned client bank.
It is worth making a note about advice at this point. Although the sale of these types of products is not regulated, giving people advice or making personal recommendations about what is suitable for them is a very heavily regulated activity.
Regulated agents have two options. They can make recommendations to invest where these products are suitable for their clients, just as they do with any other regulated product – in my view this makes their advice genuinely unrestricted, independent and whole of market. The other option is to go down the route of non-advised sales, by being explicitly clear to clients that they are not advising or making a recommendation, just providing the information for a client to come to their own educated decision. Many IFAs do this by setting up a separate and distinct business for the promotion of alternative investments.
iii) Unregulated collective investment schemes
This is the grey area for many people – not least because the name is misleading. Although the underlying asset may well be unregulated, if the structure around it modifies the exposure when compared to a direct holding in the asset; or if there is any pooling of contributions, income or profits; or if investors do not have day-to-day control of their asset then the FSA would consider that this is a collective investment scheme and therefore regulated. Furthermore, the promotion and sale of these schemes is restricted to sophisticated investors and wealthy individuals only. The FSA takes a very dim view of agents who do not follow these rules and have issued several fines recently. The onus is really on agents and their networks to ensure that their products do not fall into this category if they are going to promote to the average client.
Alternatives and Self-invested personal pensions
Alternatives are ideal for Sipps, especially if you are making non-advised sales – it is a self-invested pension after all. And Sipps are one area where transactions are still high as consumers take control of their retirement planning. However, there are HMRC rules around exactly what is Sipp-acceptable – or more correctly, what will or will not incur a hefty tax charge.
Again the rules are complex, but the two key assets that cannot be held within a Sipp are residential property (including residential ground rents, timeshares, holiday homes and the grounds of residential properties) and “tangible moveable property”. This includes art, antiques, fine wine and vintage cars for example. Basically, anything that one can touch and move potentially falls into the tangible moveable property category, with the exception of investment grade gold bullion – however as there can be no “personal enjoyment”, the gold needs to remain in vaults rather than on the mantelpiece.
Non-regulated alternative investments can replace lost commission income and, along with the Sipp proposition, have a strong appeal to consumers. If you are looking for a place to make your small business payment processing better, you can check out APM Payment systems.
Daniel Kiernan is a director of Intelligent Partnership
Original Article : FT Adviser
By Daniel Kiernan | Published Feb 23, 2012 |