U.K. regulatory authorities apply strict rules regarding the type of products platforms can market to retail investors. Complex and higher risk products are confined to professional, sophisticated or high-net-worth investors.
The FCA published rules which ban the promotion of units in unregulated collective investment schemes (UCIS) and a broad range of “close substitutes” (collectively known as non-mainstream pooled investments – NMPIs) to the vast majority of retail investors in the U.K. from 1 January 2014.
The rules were implemented to reduce the possibility of uninformed investors pouring their life savings into risky ventures and schemes. We can, in theory, buy or invest in what we like but platforms and finance companies are restricted in what they can promote and market to us.
So what are the investor categories?
A retail investor typically refers to people with little or no prior experience of investing in either equity or lending products. Generally, the investments offered on alternative finance platforms also fall under the FCA restrictions. Some equity crowdfunding platforms accept retail investors but limit investments to 10 percent of a client’s investable assets. For most of the P2P platforms, anyone can invest any amount.
A retail investor is someone who is not a professional client. The requirements are defined in the FCA Rules in COBS 4.12.3R.
(1) A firm must not communicate or approve an invitation or inducement to participate in, acquire, or underwrite a non-mainstream pooled investment where that invitation or inducement is addressed to or disseminated in such a way that it is likely to be received by a retail client.
High Net Worth Investor
A certified high net worth investor is an individual who meets the requirements as defined in the FCA Rules set out in COBS 4.12.6R. A certified high net worth investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:
HIGH NET WORTH INVESTOR STATEMENT
I make this statement so that I can receive promotional communications which are exempt from the restriction on the promotion of non-mainstream pooled investments. The exemption relates to certified high net worth investors and I declare that I qualify as such because at least one of the following applies to me:
I had, throughout the financial year immediately preceding the date below, an annual income to the value of £100,000 or more;
I held, throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more. Net assets for these purposes do not include:
the property which is my primary residence or any money raised through a loan secured on that property;
any rights of mine under a qualifying contract of insurance; or
any benefits (in the form of pensions or otherwise) which are payable on the termination of my service or on my death or retirement and to which I am (or my dependents are), or may be, entitled.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on non-mainstream pooled investments.
However, even if you don't have such resources, you can still buy unregulated products if you qualify as a sophisticated investor.
A sophisticated investor is an individual who meets the requirements defined in the FCA Rules in requirements set out in COBS 4.12.7R.
SOPHISTICATED INVESTOR STATEMENT
I am a self-certified sophisticated investor because at least one of the following applies:
I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;
I have made more than one investment in an unlisted company in the two years prior to the date below;
I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me seek advice from someone who specialises in advising on non-mainstream pooled investments.
A professional must meet the requirements defined in the FCA Rules in requirements set out in COBS 3.5.2R.
A professional client is an entity required to be authorised or regulated to operate in the financial markets such as a credit institution, investment firm or any other authorised or regulated financial institution.