The sale of unregulated collective investment schemes (UCIS) to ordinary investors has intensified in some markets since UK authorities banned their sale in the UK last year, according to expat advisers AES International.
Following the ban, which was introduced by the Financial Conduct Authority (FCA) in January 2014, many of those who previously targeted investors in the UK turned their attention to the expatriate market.
AES International estimates it has seen a 50% increase in the number of ‘unsophisticated’ retail clients with UCIS products, and warned their sale and that of other esoteric and specialised funds is now rife.
David Norton, head of investments at AES International, said: “As the FCA demonstrated when it banned the sale of UCIS funds to ordinary investors, these products are usually completely unsuitable for mainstream investors.
“The risks they carry are often disproportionate to the potential returns and they frequently become gated because of liquidity problems related to the types of underlying asset which they hold.
“They may be suitable for some professional or high net worth investors to hold as a percentage of their portfolio, but we come across many expatriates with investment portfolios which are nearly entirely allocated to UCIS and other esoteric funds, often with disastrous consequences.”
Some well known international life companies are complicit in the distribution of these products, say AES International, as they allow unregulated financial advisers to encourage clients to hold them within the offshore insurance wrappers they provide.
Part of the reason these UCIS products are so widely sold in international markets, say AES International, is because of the high, often hidden commissions they pay those who sell them. When this is coupled with the charges built into some typical insurance wrappers, investors have no real chance of ever seeing a return on their money.
David Norton said: “It is commonplace in markets where there are high concentrations of British expatriates seeking financial advice, to see unscrupulous offshore financial salesmen looking to exploit lax regulation and a lack of awareness from clients, for their own gains.
“Very rarely are these funds in the best interests of the clients, but in every case, the salesmen stands to gain through the commission they are paid for pushing them.
“We are trying to educate consumers about the dangers of these products and raise awareness more generally about the damage they cause.”