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Esoteric Investments

Hotel Rooms is just one asset type among many that would be referred to as esoteric and despite the warnings from many voices in our industry, these types of investment are becoming ever more popular.  This is due in no small part to fact that providers prepared to handle them are typically offering returns that are hard to find with more conventional investment classes.  6% to 10% return is a typical offering for Hotel Rooms. Try finding that with TIPs or cash deposits etc.

The current heightened profile of esoteric investments is probably attributable to a number of things though, but before we get onto that, what are they?  There is no definitive list and even if there were, there’d be little point in paying too much attention to it as it’d change on a daily basis.  However, put simply, esoteric investments could be defined as pretty much anything that is slightly out of the ordinary and/or requires expert knowledge on the part of the Provider and Adviser before it should be considered by a Client.

Hotel Rooms, Copyrights, Prisons, stakes in care homes, Carbon Trading and even good old fashioned Overseas Property could all be regarded as esoteric.  There are plenty more besides these and whilst we at PSG are all about making things happen for Advisers and their clients, we always urge people to proceed with extreme caution and we can help any interested parties reach their own fully informed opinion on whether they should proceed, as well as whether they can.

In simple terms, here at PSG we allow access to any investment that does not attract HMRC tax charges under Post A-Day regulations and legislation.  However, as is likely to be something of a recurring theme over the next few years (when is it not one?); nothing is ever that simple.

We will always do our best to render things as easy to understand as possible, but some things need more careful pulling apart than others and this is never more true than where esoteric investments are concerned.  Due to increasing numbers of esoteric investments popping up in SSASs and SIPPs, various regulatory bodies are shuffling things about in a bid to gain more control of them.

If we take Hotel Rooms as our specific example again, these are increasingly being categorised as esoteric by the FSA and by HMRC and in fact the FSA often go even further and deem them to be Unauthorised Collective Investment Schemes (UCIS).  This is an attempt to bring what are otherwise unregulated investments, inside the regulatory framework and therefore within the FSA’s jurisdiction, with all the regulatory implications that UCIS entails.

On that basis, it is fair to say that like PSG, all providers are (or should be) being very careful before accepting investments of this nature. As any SIPP provider will tell you, providers are now also expected to critically assess the suitability of the SIPP before accepting a new client.  This suitability test, though typically ill defined by the regulator, must include scrutiny of the proposed investment(s). 

We readily accept that the FSA are seeking to force SIPP Operators to become involved in and encroach on, an area that is in fact the responsibility of the IFA who is, of course, authorised by the FSA in any case and clearly better qualified than a provider to give advice (which legally the provider cannot usually do anyway). 

Ignoring the changes to the regulatory landscape is not an option. However, if you wish to remain truly client focused, neither is assuming that such investment options are now closed off or soon will be.

Our approach to this issue is the same one we use for everything; we will work with advisers from across all areas of the industry to establish a process which allows us to carry out our investment due diligence but does not place any unnecessary barriers in the way of interesting and potentially high yield transactions.

We believe the key to always being on the right side of prevailing legislation whilst looking for reasons to do something, rather than reasons not to, lies in building relationships based on mutual understanding and pragmatism.

© Duncan Parsons, PSG, 02/12/11

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