Unregulated Collective Investment Schemes

If you’re fairly new to investing, then looking at something different, even a bit ‘off the wall’, is a natural step as your confidence grows. Do you think you might get bored of bonds or sick of shares? 

There are plenty of other investment options out there, but just make sure you do your research first as some can come with serious risks attached. Before you look beyond the mainstream, you need to understand exactly what you’re putting your money into, and the potential risk of losing everything you’ve invested. Remember, knowledge is your biggest asset. 

One of the most speculative, riskiest investments is the UCIS, an unregulated pooled investment scheme that can invest in just about anything. This could look like a formal fund managed by a professional, or something as informal as pooling money together with friends or family to invest in things like whisky casks or plots of land — without you even realising that it counts as a UCIS. And while the appeal of something different can be tempting, the reality of investing in a UCIS has left many investors badly burned.

Let’s take a closer look. 

What is a collective investment scheme (CIS)?

A collective investment scheme (CIS) - sometimes known as a 'pooled investment' - is a fund that usually has several people contribute to it.  

The fund manager of a CIS will invest investors' money into one or more types of investment, such as stocks, bonds or property.

There are many types of collective investment schemes available to investors. They may be authorised UK schemes or 'recognised' schemes from other countries.

When a CIS is regulated, there are controls on what the manager’s allowed to do with investors’ money. This means you can be confident that your money is being invested where the description says it is. For example, a UK equity fund should mostly invest in UK companies.

What is an unregulated collective investment scheme (UCIS)?

A regulated CIS is one that has been officially authorised by us (the FCA) to operate in the UK. To receive this approval, schemes must meet specific standards designed to protect investors like you. If something goes wrong, you are also more likely to have access to compensation and other protections. 

If a CIS has not been authorised by us, it is considered an unregulated collective investment scheme (UCIS). This means it does not have to meet the same standards, and if something goes wrong, your money may not be protected. 

Before investing in a CIS, use the FCA Firm Checker to check whether the firm is authorised by us and what they are authorised for. 

Learn more about the relationship between Risk and Returns.

What are the key risks of buying a UCIS?

They often invest in risky, volatile things

While mainstream investment products typically put clients’ money into established companies, with a track record of being in business, a UCIS might invest in altogether more speculative, high-risk areas.

Their assets can be very difficult to value

The prices of company shares that trade on stock exchanges are published every day – and you can easily track the minute-by-minute prices on your phone. But the more obscure things that a UCIS can invest in aren’t traded nearly so often – valuations are tougher to determine. Unlike shares, they don’t have daily closing prices. Instead, valuations could be based on a subjective opinion and are sometimes estimated, following recent sales of similar assets.

UCIS assets tend to be much less liquid

Getting your money out of a UCIS quickly could be difficult. Unlike widely held shares or bonds that are traded in volume, the more obscure assets held by a UCIS usually trade much less often, perhaps at an art auction, or property sale. Even if a UCIS buys shares, they might be in smaller, newer companies that don’t trade on a stock market, so buying or selling might take much longer.

Control & governance concerns

As a UCIS is unregulated and isn’t subject to the same regulations as mainstream investments, many things you take for granted with other investments just won’t apply. For example, a UCIS that claims to invest in UK property might buy into businesses in holiday resorts or even directly in parking spaces/hotel rooms in other countries. These may or may not prove to be good investments – but they’re probably not ones you’d have expected when you signed up. In short, unregulated investments like a UCIS leave investors more prone to abusive practices.

Lack of reliable, trustworthy performance info

Regulated investments must regularly provide investors with accurate and honest information about how they’re performing. On the other hand, UCIS providers are under no such requirement. So not only are many assets held in these schemes more difficult to value, there’s no responsibility on the provider to give a truthful and accurate account to investors as to how their investments are doing. This means there’s even more risk of getting a nasty surprise when you want to get your money out.

Before you invest

If in doubt about any investment opportunity presented to you, consider getting financial advice to understand the risks and opportunities involved. As with any investment you’ve heard of, if something doesn’t sound right or you think the information you’re being given is misleading, consider whether it could be a scam. Use the Firm Checker to check that any firm you’re dealing with is authorised, registered and approved for the services they’re offering.

For most investors, conventional, widely available, low-risk investment products are likely to be more appropriate than any UCIS. Learn more about mainstream investments.