What is a collective investment scheme?
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A collective investment scheme (CIS) is a fund that multiple people contribute to. They are otherwise known as a ‘pooled investment’. A fund manager will invest the fund in different types of assets, such as property, stocks or bonds.
Why invest in a collective investment scheme?
There are several advantages to investing in a CIS. Investors may be able to hire professional investment managers, who should be able to offer improved risk management or better returns. They may also benefit from economies of scale. Or be able to increase the asset diversification to reduce some unsystematic risk.
Who’s involved in a collective investment scheme?
Besides investors, who own the assets and associated income, there are typically a few key figures involved in a collective investment scheme. There is usually a fund manager who manages the investment decisions. As well as, a fund administrator who manages the trading, reconciliations, valuation and unit pricing. Protecting assets by ensuring compliance with the law is usually a role attributed to a board of directors.
What’s the difference between a unit trust and an investment trust?
These are the two main types of collective investment scheme: unit trusts and investment trusts. They are different because of the number of shares they allow.
Unit trusts are known as open-ended funds – there is no limit to how many shares can be sold. Funds are pooled together and managed en-masse, and the unit trust buys assets on the behalf of investors. The monetary value of said assets is divided by the number of units issued when the fund is created to give an initial unit value. This value then fluctuates as the underlying assets trade daily and investors put money in or take money out.
Investment trusts are known as closed-end funds. They work in the same manner. But, the crucial difference is that the trust is created by selling a fixed number of shares at the outset. Hence, no new shares are created.
What are the risks of an unregulated collective investment scheme?
Unregulated collective investment schemes, known as UCIS funds, can be sold legally in the UK. But they are not authorised or regulated here. This is because they are not subject to the same borrowing and investing rules as regulated schemes. They can put money into a range of exotic assets.
The Financial Conduct Authority (FCA) has decided to ban the promotion of these ‘risky’ investment schemes following a string of high-profile scheme failures. These have caused million pounds worth of losses for many retail investors.
The reason these schemes might be risky is because the sort of underlying investments in these schemes can be hard to value and difficult to sell, which increases the likelihood of investor losses. The
FCA found that thousands of retail investors have put around £4bn into unregulated schemes, unaware of the risks.
Unfortunately, as in the infamous Harlequin Property and Sustainable Agro-Energy case, which was unregulated, returns that seem too good to be true probably are. Investors have found themselves out of pocket, and have blamed it on the financial advisor.
The FCA condemns such schemes and the Financial Ombudsman Scheme (FOS) awards compensation to aggrieved investors, so the insurers of these funds can find themselves facing a string of claims.
If you believe you’ve been mis-sold a financial product, and have found it difficult to get redress from the financial institution, contact our team of solicitors for advice and guidance on compensation.