What is a UCIS fund?

A UCIS is an investment vehicle originally set up for those asset classes that are unable to follow the FSA’s specific rules on matters such as the spread of assets, liquidity, dealing frequency, cash reserves and limitations on borrowings.

An example of an asset manager using a UCIS because the underlying asset will not fit into a CIS structure is the Capital Residential Fund from AVIVA which was established as a UCIS in 2001 to invest in London residential property. Although UCIS themselves are not directly authorised by the FSA, persons carrying on regulated activities in the UK in relation to UCIS including providing personal recommendations, arranging deals and establishing, operating and managing schemes will be subject to FSA regulation.

In the case of the Walls & Futures London Growth Fund, it is operated by Dunadd Asset Management Limited (FSA No. 460783) and managed by Walls & Futures Limited. Dunadd are responsible for ensuring that the fund complies with United Kingdom legislation as it affects UCIS, and for ensuring that the fund fulfills its obligations to investors by acting in accordance with the Partnership Agreement and related documentation.
Dunadd is regulated by the FSA and is authorised to establish, operate and wind-up unregulated collective investment schemes.

I am a non-MiFID firm, can I still promote the fund?

If you consider yourself a non-MiFID firm, you are still able to promote the Walls & Futures London Growth Fund. This is because Dunadd Asset Management, the fund operator, has the appropriate authorisation from the FSA to permit the receipt of orders in compliance with MiFID. Further information can be found in COBS 4.

Who can you promote the fund to?

The Financial Services and Markets Act 2000 ("FSMA") restricts UCIS funds being promoted to the general public. You can however promote the fund to persons that meet the following;

• Certified high net worth individuals
• Certified sophisticated investors
• Self-certified sophisticated investors; or
• Persons who have been assessed by you as falling within the following categories of the Conduct of Business sourcebook 4.12 definitions:

Category 1:	A person who is already a participant in an unregulated collective investment scheme; A person who has been, in the last 30 months, a participant in an unregulated collective investment scheme.
Category 2:	A person for whom the firm has taken reasonable steps to ensure that investment in the collective investment scheme is suitable; and who is an “established” or “newly accepted” customer
Category 6:	An exempt person
Category 7:	An eligible counterparty or a professional client

Category 2 offers the greatest scope when dealing with your client base and will probably be the exemption used most by IFAs and investment managers.

Quality of advice (suitability) & Know your customer (KYC) information

We strongly suggest that a KYC and research & suitability assessment is carried out before a recommendation is made and before there is any discussion about a particular unregulated scheme.This principle Guidance relating to suitability is covered in COBS 9.

We have put together a Suitability Template to assist you when writing to your clients.

UCIS funds & my Professional Indemnity policy

We have spoken to a number of advisers who are under the impression that their PI policy precludes them from promoting UCIS funds. However this is not strictly the case.

Stuart Burch, Associate Director at Lloyd’s Broker, Oxford Insurance Brokers says they are helping an increasing number of firms obtain the right coverage for their activities at a sustainable price. For example, Oxford have helped firms obtain cover for some of their UCIS investments by providing positive clarification of some sensible, yet simple statements such as:

• Full details of all UCIS advised on or recommended, including investor name, product, amount invested, current value (if available)
• Confirmation that no more than 10% of any portfolio is made up of UCIS
• Suitability and the risk profiling that was undertaken and provided
• Know your exemptions. The majority of successful UCIS claims will succeed based solely on the incorrect classification of clients so it’s imperative that the IFA understand the rules

Oxford Insurance as Lloyd’s brokers are not in the business of promoting or endorsing the underlying business of their innumerable clients, however they are in the business of ensuring that all the firms they look after, get the professional indemnity insurance they need to go forward and prosper. For further information and to discuss your professional indemnity needs, please contact;

Stuart Burch - 020 7220 4781 or stuart.burch@oxfordinsurancebrokers.co.uk
Sue Williams - 020 7220 4194 or sue.williams@oxfordinsurancebrokers.co.uk
Jonathan Carter - 020 7220 4374 or jonathan.carter@oxfordinsurancebrokers.co.uk

Points to consider

Remember UCIS is a vehicle rather than an investment, therefore you need to investigate what’s inside;

What’s the nature of the underlying asset
• Do you understand it?
• How secure is the covenant?
• Is there a genuine market for it?
• There are always risks, so how are they managed?

Investment strategy
• Is the strategy achievable?
• Are the assumptions the returns are based on conservative?
• How are the risks managed and reduced?

Fund structure
• Where is it domiciled? If its not based in the UK, why not? Tax is often cited as a benefit of offshore funds, however UK based structures such as Scottish Limited Partnerships are completely tax transparent.
• Take a close look at the fee structure. Look for hidden costs, high set up and running charges.
• Performance fee. Make sure you understand when and how much is being paid. A performance fee should only be payable if the investors get a return and ideally there should be a minimum return (hurdle rate). Additionally make sure investor returns are paid before the performance fee is paid.

Asset manager
• Do they have relevant sector experience?
• Are the interests of the asset manager aligned with that of the investors e.g. are they co-investing?

Gearing
UCIS funds do not have restrictions on the level of gearing so be careful to understand the type and level of borrowing used e.g. is the lending non recourse?

Exit strategy
On paper a fund may appear to generate large returns but how will it be realised;
• Does the product appeal to wide pool of buyers?
• Is there a set timeframe for disposing of assets?
• Is there a clear strategy to dispose of assets?

Myths

With so much being written about UCIS funds it is natural for misunderstanding and myths to form. Below are a few;

The FSA doesn’t like UCIS
Not true: Although from reading the industry press it would appear that the FSA is arbitrarily fining firms for promoting UCIS funds, the IFA’s and firms tend to be those where investments (CIS & UCIS) have been sold to clients with little regard for suitability or KYC.

The FSA has published a report and guidance notes on good practice in this area.

UCIS funds are not regulated
Not True: Although UCIS funds are not directly regulated by the FSA, UK domiciled funds will require an FSA regulated Operator. In the case of the Walls & Futures London Growth Fund, Dunadd Asset Management oversee the activities of the fund and monitor all investments made to ensure they fit within the terms set out in the Information Memorandum.

UCIS funds are all high risk
Not true: Just like regulated funds it’s the underlying asset and the level of oversight that determines the risk. There are many different types of UCIS to choose from, therefore as a starting point it is important to understand the type of asset the fund is investing in before considering its risk.

I don’t need to consider UCIS funds
Not true: As part of RDR, to remain truly independent all authorised Advisers will have to consider UCIS for clients. It might be worth considering the services of a paraplanner to help with the research aspects.

Downloads

• A guide to UCIS & FSA
• FSA UCIS factsheet
• FSA UCIS good & poor practice report