Collective Investment Schemes Definition and Regulation

Collective investment schemes are a type of investment vehicle that pools money from multiple investors to invest in a variety of assets. These schemes are heavily regulated to protect investors.

The primary goal of collective investment schemes is to provide a way for individuals to invest in a diversified portfolio of assets with a relatively small amount of money. This is achieved through economies of scale, allowing individuals to access a wide range of investments that might be difficult to access otherwise.

Regulators have established strict guidelines to ensure that collective investment schemes operate fairly and transparently. For instance, they require schemes to have a clear investment objective, a well-defined risk profile, and a transparent fee structure.

A Collective Investment Scheme (CIS) is a type of investment vehicle that pools funds from multiple participants to invest in a variety of assets.

The CIS can take many forms, including a contract, a partnership, a trust, or a company that is an open-ended investment company (OEIC).

To be considered a CIS, the property being managed must be pooled and managed as a whole by the operator of the scheme.

The CIS operator must be authorized by the Financial Conduct Authority (FCA).

There are no limits on the structure of a CIS, and it can be regulated or unregulated.

Here are the key characteristics of a CIS:

A CIS can invest in a wide range of assets, including stocks, bonds, commodities, derivatives, and even mutual funds.

CIF Investments are a type of collective investment scheme that allows banks to gather assets from various accounts into one fund, directed by a chosen investment strategy and objective.

They can invest in a wide range of assets, including stocks, bonds, commodities, derivatives, and even mutual funds.

A CIF can be designed to maximize investment performance by combining different fiduciary assets in a single account, which can help decrease operational and administrative expenses substantially.

As of 2016, approximately $2.8 trillion was invested in CIFs, and this figure was estimated to hit $3 trillion at the end of 2018, according to a study by Cerulli Associates.

The history of collective investment schemes is marked by significant milestones. The first collective investment fund was created in 1927.

The early days of collective investment funds were marred by bad timing, as the stock market crashed two years later. This led to severe limitations on their use.

The situation began to change in the 21st century, with collective investment funds being listed on electronic mutual fund trading platforms. This increased their visibility and frequency of trades.

The Pension Protection Act of 2006 was a major boost for collective investment schemes, making them the default option for defined contribution plans.

The history of collective investment trusts is a story of evolution and adaptation. The first collective investment fund was created in 1927.

It's interesting to note that this early experiment was short-lived, as the stock market crashed just two years later. The perceived contribution of these pooled funds to the financial hardships led to severe limitations on them.

Banks were restricted to only offering collective investment funds to trust clients and through employee benefit plans. This restriction remained in place for a long time.

However, the 21st century brought significant changes to the landscape. Collective investment funds started to be listed on electronic mutual fund trading platforms, increasing their visibility and frequency of trades.

The Pension Protection Act of 2006 was a major turning point, as it effectively made collective investment funds the default option for defined contribution plans. This shift opened up new opportunities for these funds.

Target-date funds became popular, and the collective investment fund structure proved to be particularly well-suited to this type of long-term vehicle.

A regulated CIS is a specific type of collective investment scheme that has been given regulated status by the FCA. This status is distinct from the regulation of those who establish or operate the scheme.

To be considered a regulated CIS, a scheme must fall into one of the following categories: a UK authorised unit trust, a UK authorised investment company with variable capital (ICVC), a CIS recognised under s.264 FSMA, or a CIS recognised under s.272 FSMA.

A regulated CIS is typically characterised by specific requirements that must be satisfied, including the need for the FCA to be involved in the application process.

The FCA has a list of recognised CISs, which includes schemes constituted in other EEA states and overseas schemes that provide adequate protection.

Here are the specific types of regulated CISs:

These types of schemes are subject to specific regulations and requirements, which can provide an additional layer of protection for investors.

In June 2013, the FCA amended the financial promotion rules for unregulated Collective Investment Schemes (CISs) to retail investors.

The FCA made these changes due to the fact that most retail promotions and sales of unregulated CISs reviewed were inappropriate and failed to meet the existing FCA Handbook requirements.

The rule changes restrict the promotion of unregulated CISs to sophisticated investors and high net worth individuals, who are more likely to be able to protect their own interests.

The FCA has also published new webpages regarding CISs, which provide a wealth of information on the regulation of these schemes.

Here are some of the new webpages published by the FCA:

The FCA's new webpages aim to provide a clear and concise guide to the regulation of CISs, making it easier for investors and firms to navigate the rules and regulations.

Collective investment schemes allow multiple individuals to pool their money together to invest in a variety of assets.

By pooling their resources, investors can access a wider range of investment opportunities and reduce the risk associated with individual investments.

Each investor owns a portion of the scheme, known as a unit, which represents their share of the total assets.

The value of the units can fluctuate based on the performance of the underlying assets.

Investors can buy or sell units on a stock exchange or through a broker.

The scheme's assets are managed by a professional fund manager who makes investment decisions on behalf of the investors.

The manager's goal is to generate returns for the investors while managing risk and adhering to the scheme's investment objectives.

The scheme's performance is typically measured by its net asset value (NAV) per unit, which is calculated daily.

Investors can redeem their units for cash at the current NAV price.

The scheme's fees and charges are typically deducted from the investors' returns, which can include management fees, administration fees, and other expenses.

Investors should carefully review the scheme's prospectus and terms and conditions before investing.

Arrangements where investors retain ownership in their portfolios but all use the same investment manager may not be considered a Collective Investment Scheme (CIS) if they meet certain conditions. These conditions include allowing investors to withdraw their property at any time and no pooling of contributions, profits or income.

The CIS Order also excludes individual investment management arrangements, essentially PEPs and ISAs, from the definition of a CIS. This means that certain types of investment accounts are not considered CISs.

Other exclusions from the definition of a CIS include enterprise initiative schemes, bank deposits, and schemes not operated by way of business. Some specific examples of excluded arrangements include trading schemes, timeshare arrangements, and schemes for personal enjoyment of property.

CIFs are often included in 401(k) plans as a stable value option. This is evident in a report on "TheStreet.com" that found CIFs' share of 401(k) plan assets increased from 6% in 2000 to an estimated 19% in 2016.

The presence of CIFs in 401(k) plans has been steadily increasing, with a report from Callan finding that 65% of plans included CIFs in 2017.

In some cases, certain arrangements may not be considered a Collective Investment Scheme (CIS) due to specific exclusions.

The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 contains a number of exclusions, including arrangements where investors retain ownership in their portfolios but all use the services of the same investment manager.

These arrangements are excluded if the investor can withdraw their property at any time, there is no pooling of contributions, profits or income, and the management function is limited to buying and selling investments in bulk on behalf of the various investors.

Other exclusions include individual investment management arrangements, such as PEPs and ISAs, as well as enterprise initiative schemes and bank deposits.

Some exclusions also apply to schemes not operated by way of business, debt issues, common accounts, and certain funds relating to leasehold property.

The following list highlights some of the specific exclusions mentioned in the CIS Order: