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UK tightens rules on art funds

Watchdog limits the marketing of pooled investment opportunities to “sophisticated investors”

The UK ban aims to protect inexperienced investors from risky propositions more suited to experts

UK art funds are facing tighter regulation after a ban on marketing to investors with little relevant knowledge was confirmed by the Financial Conduct Authority (FCA, formerly the Financial Services Authority) in June.

The ban applies to unregulated collective investment schemes (UCIS), a term used to describe pooled investments, which are not directly authorised by the FCA. This includes most art funds as well as schemes for other investable alternative assets such as wine.

Under the new rules, the promotion of investment opportunities is restricted to “sophisticated investors”, described as having “extensive” investment experience, or high-net-worth individuals, defined as having an annual income of more than £100,000 or investable net assets of more than £250,000. This is unlikely to affect mainstream art funds, such as the Fine Art Fund, which is mostly marketed outside the UK and has its initial investment threshold at the (ever-increasing) $1m mark, but it is likely to affect businesses operating at lower price points. The ban is due to take effect on 1 January 2014.

The FCA decided to take action after the failure of a number of non-mainstream pooled investments (not necessarily art-related). “Consumers have lost substantial amounts of money investing in UCIS and similar products in recent years,” says Christopher Woolard, the FCA’s director of policy, risk and research, in a press release. “[These] rules should go a long way in helping to protect the majority of retail [ie individual] investors from inappropriate promotions, while allowing the industry to market these risky, unusual or complex investment propositions to those experienced investors for whom they could be suitable options.”

The announcement of the ban comes just before a European directive that aims to put hedge and equity funds under closer supervision. The Alternative Investment Fund Managers Directive is due to be ratified by European Union member states on 22 July. Although the two regulatory tools are not directly linked, the UK ban is seen as consistent with the European directive, which imposes a minimum set of standards for funds, to create a more transparent process for non-mainstream investment. The directive could also lead to valuations of art having to be made by an independent body and the obligation of fund managers to set up “depositories” to safeguard assets.

Some in the art sector are optimistic that increased regulation will bring welcome stability to the marketplace. “Tighter regulation means that the standards and governance of these funds are likely to strengthen and, in the longer term, it will help make these alternative asset funds more credible,” says Anders Petterson, the managing director of ArtTactic. “It’s fair to leave alternative investments, which are often highly risky or require a thorough ­understanding of the marketplace, to ­people who can afford to lose the money and understand the risks.”

Others predict alternative consequences. Christopher Stuart-Sinclair, a member of Deloitte’s regulatory consulting division, says: “The paradox is that regulation is likely to reinforce fragmentation of the ‘passion’ investing segment but [also] open up a new, if potentially limited, investor segment of pure financial institutional ­investment.”

While the number of art funds in existence remains relatively small, and focused on investors with a strong interest in the art sector, Stuart-Sinclair suggests that these ongoing shifts could strengthen the attraction of non-fund, informal structures and co-investments, such as investment clubs.

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