The U.K. has been going through a series of growing pains as the government and regulators have been implementing a number of reforms since the global economic recession started in 2008. These reforms have affected how mortgages are insured, the practice of swaps being coupled with commercial loans, and how interest rates have been set.

Exotic Fringe Investments

Now the U.K. regulatory agencies are also stepping into the world of fringe investments, considering putting a cap on high-risk assets being offered for investment purposes. Such risky assets would include things like collecting vintage cars or fine wines or even more eccentric investments such as investing in specialty product agricultural farms. In the zeal to right the wrong, the latest reform push may snag a number of U.K. companies within its nets.

Real Estate Investment Trusts

Real estate investment trusts or REITs have been a common way for public investors to put money into various forms of the real estate market to profit of its potential growth. However, because of the types of properties REITs can actually invest fund money into, they may end up on the final banned list developed by regulators. Dubbed “non-mainstream” products, any type of investment falls into the non-mainstream category is fair game for being included. However, REITs have been a bit of a common investment for years, so the Financial Services Authority position on the matter is causing confusion.

The government’s reaction is due to pressure for some kind of action after numerous instances of questionable investment selling and fraud have occurred, especially where lower income victims were convinced to put their pension funds into investments nobody with any financial savvy would have touched with a ten foot pole.

The new changes are expected to be implemented by the FSA in March 2013, restricting financial advisers in whom they can market “alternative category” investments to. This allowable target group is generally expected to be only the well-to-do or clients who have exhibited a clear knowledge of investment markets.

Earlier attempts to regulate the industry through cooperation and voluntary self-regulation have failed to meet FSA expectations. Assessments that advisers were supposed to follow-through on before marketing to a given investor have been systemically ignored. As a result, the FSA found a high risk for heavy loss on the part of investors who, by all accounts, were being sold exotic investments they knew little about.

The issue hasn’t gone without a strong reaction. The British Property Federation has entered the fray objecting to the concept of including REITs in the “banned” list. According to the Federation, they were caught off guard by the change in discussion and inclusion of REITs on the possible list of affected investment categories. Further, there’s a general contradiction in the potential move as it was the government, according to the Federation, that first pushed REITs as a “safe” entry into real estate investment for the average stockholder in 2007. This government marketing continued into 2012, with the U.K. Treasury being among the agencies promoting investment in REITs.

It’s important to note that the rules for consideration aren’t going to ban the investment in REITs or similar tools caught up on the “banned” list outright. The individual investor can still, on his own, pursue such investments. Instead, financial investors would be barred from bringing up these investment options at all, whether marketing or in proactive conversation, with a client. Given the criticism starting to be voiced, the FSA is hedging its final position, stating it is taking comments from both consumers and industry voices as to whether REITs and similar should be included.

Current estimates figure that approximately 2.5 billion British pounds of investments are in non-mainstream categories currently, being held by 85,000 average investors. Another 1.5 billion British pounds could be sitting in exotic securities with similar risk.

 

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.