Considering Non-Mainstream Richard Nuttall – Head of Compliance Policy

Learning Outcomes What is required to be ‘Independent’ Why Do (UCIS and) NMPIs matter? What are NMPIs? The nature of the ‘ban’ on NMPIs What are ‘Sophisticated’/ ‘HNW’ Investors Referrals

Independent - What the Regulator says... ... If a firm is offering an independent service, clients would expect the advice to be ‘unbiased and unrestricted’, and they would expect advisers to consider all solutions that would be potentially suitable for their needs... ...i.e. based on a ‘comprehensive and fair analysis’ of the market... Let’s take a look at the FCA expectations of an independent service

“Consider” Does not Mean “Advise” “Promote” “Sell” OR EVEN “Think about it and then refer the client elsewhere” Moving back to the main topic That’s not the real dictionary of ‘consider’ but the FCA’s Which is “to take account of the possibility of including the product, in appropriate circumstances, in a personal recommendation for appropriate clients” BUT This needs to happen in house, having a process which says that you will refer all, say, VCT business to another firm would prevent your firm calling itself ‘Independent’. One important point here is that not having PII cover in place for a class of business will be a strong indicator that you have no intention of considering that class of business.

Advisers do not have to take on clients Referrals Pension Transfers Long Term Care FCA approach to referrals:- Refer specific case(s) to a specialist adviser BUT this must be an internal referral Advisers do not have to take on clients

What are Non Mainstream Products (NMP’s)...? Venture Capital Trusts (VCT’s) Investment Trusts Structured products AIM investments Exchange Traded Funds & Products (ETF’s / ETP’s) Enterprise Investment Schemes (EIS’s) Absolute Return Funds

For ‘Suitable’ Clients Key Benefits For ‘Suitable’ Clients Potential for higher returns Potential for tax benefits Non-correlated assets

Policy Statement 13/3 “But I thought we were banned from promoting non-mainstream products?” You are! Well banned from promoting NMPIs – Non-Mainstream Pooled Investments So what are NMPIs?

Non-Mainstream Pooled Investments PS13/3 effective from 1st January 2014 This contained a list of products considered to be ‘NMPIs’. Features include: Underlying assets usually being speculative, illiquid and or difficult to value accurately Strategies, T&Cs etc, are often highly complex Can carry heightened governance risks

Non-Mainstream Pooled Investments Traded Life Policy Investments Unregulated Collective Investment Schemes Enterprise Investment Schemes Qualifying Investor Schemes Seed EIS TLPI UCIS SPV Special Purpose Vehicles EIS QIS SEIS

The Ban This is about the ‘Promotion’ of NMPIs A promotion is “An invitation or inducement to engage in investment activity that is communicated in the course of business”

The Ban Promotion to ‘Ordinary’ Retail Investors Advice = Promotion Promotion ≠ Advice

The Ban!

The Ban! Retail Investors Ordinary HNW Sophisticated

Who are High Net Worth Investors A Certified High Net Worth Investor is someone…. ... who has signed within the period 12 months ending with the day on which the communication is made, a HNW Investor Statement confirming... Annual income to the value of £100k or more Held net assets to the value of £250k or more Excludes: main property any rights of the client under a qualifying contract of insurance benefits from a pension schemes

Key Point 1 The fact that a client is HNW or sophisticated does not mean that a NMPI will be suitable for them. WHY?

Suitability Client should probably be both High Net Worth and Sophisticated (K&E/Affordability/CfL) Small proportion of investable assets High ATR Investing for longer term Investment not targeted for specific term

Non-Mainstream Pooled Investments Structured Products VCT TLPI EIS SPV AIM NMPIs UCIS SEIS ETP or ETF QIS Absolute return funds

Key Point 2 The fact that a product is not an NMPI does not mean it is suitable for all clients WHY?

Key Point 2 Liquidity - Potential access Specific Term - Timescale for Investment Liquidity - Potential access Early Penalties – tax repayment 25% / 10% Guidelines Risk Profile of Overall Portfolio Clients Knowledge & Experience Risk/Reward Expectations Cap on Maximum Returns Understanding the Risks

Key Point 3 Clients with specific interests in ‘social impact’ or ‘charity’ investment still have to meet the requirements of: HNW/Sophisticated ATR Capacity for loss

Independence - Initial Assessment “As an Independent Adviser I am able to consider products from across the whole market when providing a solution to your needs. Some products are more complex and less liquid than others and can have reduced access to the Financial Services Compensation Scheme (FSCS). Do you want us to include contracts of this nature (complex, illiquid and without access to the FSCS) in our recommendations to you should they seem appropriate? Yes/No/I don’t want to rule anything out at this stage

Execution Only – Insistent Clients Not a Promotion Principles still apply – Client’s Best Interests Don’t accept a referral as an instruction Expect FCA to monitor this

DFMs / UCITS DFMs should note the regulatory view on suitability Only include where suitable for each specific client But true discretionary unlikely to be a promotion You can recommend regulated CISs that contain UCISs instruments

Due Diligence Get copy of final Memorandum/Prospectus Quantify charges Identify risks within the investment (currency, counter parties, climate, pests, etc.) Identify sector risks (medical advances, political instability etc) Identify risk mitigation arrangements Look for guarantees/security Look at exit routes – including on death

Due Diligence Look for experience of management team Look for track record of the investment Look for domicile of arrangement Payment or Commitment Ability to extend term Ability to suspend payments Strength of management and counter parties Validity of tax advantages Etc, etc.

Supporting you…… Dedicated team of seven consultants, all minimum Diploma qualified who are experienced in checking EIS, VCT’s, Structured Products etc. Guidance can be provided pre sale before you place the business or make a recommendation to your client Fully independent and non biased review (nearly 4,000 YTD) We have template Suitability Reports on our website for you to use and adapt

Supporting you…. Industry norm is 10% of new business written is compliance checked Plus all high risk products. Are these considered high risk? That is where our file review team can help you

Supporting you….. Main reason for files failing: Have you categorised your client – can you promote this type of product? Other issues: Research & Due Diligence ATR/CFL Risk Warnings Taxation

Learning Outcomes What is required to be ‘Independent’ Why Do (UCIS and) NMPIs matter? What are NMPIs? The nature of the ‘ban’ on NMPIs What are ‘Sophisticated’/ ‘HNW’ Investors Referrals