FSA to consider extending retail investment product range
It will include new authorised funds of hedge funds.
This would enable retail investors, who are already gaining access to products with hedge-fund investment characteristics through a variety of means, to invest in products that would be subject to the FSA’s regime for authorised collective investment schemes.
The funds would be subject to structural and operational safeguards including the requirement to have an independent depositary. In addition, the fund of hedge funds managers will not be able to invest into all hedge funds – there will be liquidity criteria, for example, in respect of the underlying funds. This should enhance investor protection whilst allowing increased investor choice.
The decision to consult is published today in the FSA’s feedback to Discussion Paper 05/3 Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World, which considered the increasing variety of retail investment products, the risks these products posed to consumers, and how those risks could be addressed.
Clive Briault, FSA managing director for retail markets, said:
“Retail investors can currently gain access to products with hedge-fund investment characteristics through a variety of means, including listed funds of hedge funds, funds offered on the internet from European jurisdictions, structured products linked to hedge fund indices and funds under the UCITS III (Undertakings for Collective Investments in Transferable Securities) Directive.
“Given the reality of the contemporary retail market, it seems sensible to permit the marketing of funds of hedge funds through an authorised, onshore vehicle. These onshore funds of funds would benefit from the protections already in place for authorised funds.
“We also need to consider how we can help consumers to understand the features and risks associated with these products. Our consultation will also address these important issues.”
The discussion paper on retail investment products identified three risks to consumers posed by the current suite of retail investment products. These were: lack of consumer understanding of newer products; confusion over the sales and distribution channels used; and possible detriment caused by marketing prohibitions on certain unregulated funds.
In addition to consulting on a possible extension of the range of authorised collective investment schemes the FSA proposes to focus on two additional areas of relevance to the wider range of investment products currently in the market:
– Consumer education and awareness – the FSA will reinforce its existing consumer information and awareness work, stressing the increasing need for consumers to invest proportionately across a range of products, to read the disclosure material they receive, and to seek financial advice when necessary; and
– Product provider responsibility – the FSA will examine the role that product providers and distributors play in ensuring customers are treated fairly, primarily through the provision and use of product information. Some of this work is already being carried out under the Treating Customers Fairly project from which results will be published later this year.
The FSA will shortly be publishing a consultation paper on changes to the Listing Rules for investment entities, which are designed to provide investment entities with greater choice in their selection of investment strategies, whilst maintaining appropriate standards of investor protection.
A feedback statement to the accompanying Discussion Paper 05/4 – Hedge Funds: A Discussion of Risk and Regulatory Engagement has also been published.