COBS 4—exemptions in relation to UCIS and close substitutes
COBS 4—exemptions in relation to UCIS and close substitutes

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • COBS 4—exemptions in relation to UCIS and close substitutes
  • What are non-mainstream pooled investments?
  • Restrictions on promotion of NMPIs
  • The effect of COB 12.4 on retail distribution channels

This Practice Note explains the exemptions from the financial promotion restriction which are contained in chapter 4.12 of the Financial Conduct Authority (FCA) Conduct of Business Sourcebook (COBS 4.12). COBS 4.12 sets out rules relating to the restrictions on the retail distribution of unregulated collective investment schemes (UCIS) and close substitutes (together defined as non-mainstream pooled investments (NMPIs) to ordinary retail investors. The COBS 4.12 requirements in were introduced on 1 January 2014 through PS13/3: Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes.

What are non-mainstream pooled investments?

The rules in COBS 4.12 aim to protect ordinary retail investors from risks arising from the inappropriate promotion of NMPIs where retail investors are sold products which are complex in nature and present a risk that the 'average' retail investor may not be familiar with or truly understand.

The category of NMPIs includes, in addition to all UCIS, units in qualified investor schemes (QIS), traded life policy investments, securities issued by special purpose vehicles (SPVs) and any forms of rights to or interests in any of these types of investment. They can also sometimes include other investment arrangements which are not necessarily funds. As such, the definition of a NMPI should be considered on a case by case basis.

Firms are therefore required to analyse investments that they may wish to promote in

order to ascertain whether the investment in question falls within the definition of a NMPI. This analysis is increasingly important as the FCA's original definition of a 'special purpose vehicle' was designed to refer to securitisation vehicles in a regulatory capital context rather than to define products in a retail investor protection context. For further information, see News Analysis: New rules for unregulated collective investment schemes.

The table below outlines the products that are subject to the marketing restriction and those that are out-of-scope.

Products subject to the marketing restrictions include:Products not subject to the marketing restrictions include:
Units in UCISExchange traded products
Traded life policy investmentsVenture capital trusts
Units in QISReal estate investment trusts
Securities issued by SPVs pooling investment in assets other than listed or unlisted shares or bondsEnterprise investment schemes (unless structured as UCIS)
Seed enterprise investment schemes (unless structured as UCIS)
Overseas investment companies that would meet the criteria for investment trust status if based in the UK
SPVs pooling investment primarily in shares and bonds
Several fund-like arrangements, which do not take the legal form of a NMPI

There is a useful flowchart in Annex 4 of the Policy Statement which assesses whether a product is an NMPI under the rules.

Restrictions on promotion of NMPIs

In the UK an authorised person is prohibited from communicating an invitation or inducement to participate in a NMPI under (COBS 4.12.3 R).

The restriction in COBS 4.12.3 R does not apply if the promotion falls within an exemption in the table below:

Title of ExemptionPromotion to:Promotion of a NMPI which is:
1. Replacement products and rights issuesA person who already participates in, owns, holds rights to or interests in, a NMPI that is being liquidated or wound down or which is undergoing a rights issue. 1. A NMPI which is intended by the operator or manager to absorb or take over the assets of that NMPI, or which is being offered by the operator or manager of that NMPI as an alternative to cash on its liquidation;
2. Securities offered by the existing NMPI as part of a rights issue.
2. Certified high net worth investorsAn individual who meets the requirements set out in COBS 4.12.6 R, or a person (or persons) legally empowered to make investment decisions on behalf of such individual 6. For more information about certified highnet worth investors, see Practice Note: Financial Promotion Order: Exemptions for financial services practice.Any NMPI the firm considers is likely to be suitable for that individual, based on a preliminary assessment of the client's profile and objectives.
[See COBS 4.12.5 G (2).]
3. Enterprise and charitable fundsA person who is eligible to participate or invest in an arrangement constituted under:
(1) the Church Funds Investment Measure 1958;
(2) section 96 or 100 of the Charities Act 2011;
(3) section 25 of the Charities Act (Northern Ireland) 1964;
(4) the Regulation on European Venture Capital Funds (‘EuVECAs’); or
(5) the Regulation on European Social Entrepreneurship Funds (‘EuSEFs’).
Any NMPI which is such an arrangement.
4. Eligible employeesAn eligible employee, that is, a person who is:
(1) an officer;
(2) an employee
(3) a former officer or employee; or
(4) a member of the immediate family of any of (1) - (3), of an employer which is (or is in the same group as) the firm, or which has accepted responsibility for the activities of the firm in carrying out the designated investment business in question.
1. A NMPI, the instrument constituting which:
A. restricts the property of the NMPI, apart from cash and near cash, to:
(1) (where the employer is a company) shares in and debentures of the company or any other connected company;
(2) (in any case), any property, provided that the NMPI takes the form of:
(i) a limited partnership , under the terms of which the employer (or connected company) will be the unlimited partner and the eligible employees will be some or all of the limited partners; or
(ii) a trust which the firm reasonably believes not to contain any risk that any eligible employee may be liable to make any further payments (other than charges) for investment transactions earlier entered into, which the eligible employee was not aware of at the time he entered into them; and
B. (in a case falling within A(1) above) restricts participation in the NMPI to eligible employees , the employer and any connected company .
2. Any NMPI, provided that the participation of eligible employees is to facilitate their co-investment:
(i) with one or more companies in the same group as their employer (which may include the employer); or
(ii) with one or more clients of such a company .
5. Members of the Society of Lloyd’sA person admitted to membership of the Society of Lloyd's or any person by law entitled or bound to administer his affairs.
A scheme in the form of a limited partnership which is established for the sole purpose of underwriting insurance business at Lloyd's.

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