1. Considering Non-Mainstream
Richard Nuttall – Head of Compliance Policy

2. 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

3. 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

4. “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.

5. 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

6. 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

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

8. 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?

9. 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

10. 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

11. 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”

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

13. The Ban!

14. The Ban!
Retail Investors
Ordinary
HNW
Sophisticated

15. 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

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

17. 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

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

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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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.

27. 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

28. 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

29. 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

30. 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