FCA plans to broaden retail access to LTAFs ‘may not go far enough’

LTAFs are intended to help better manage the liquidity risk of long-term illiquid assets by allowing redemptions not more than once a month and with at least 90 days’ notice. A full-scope alternative investment fund manager (AIFM) must be appointed to manage an LTAF, providing further protection for investors.

The FCA’s proposals come after the working group, made up of a range of pension schemes, investment consultants, asset managers and trade associations, published a report last year that recommended allowing the retail mass-marketing of LTAFs by giving them the same regulatory treatment as non-readily realisable securities (NRRS).

The working group also suggested removing the 35% cap on investment in illiquid assets through unit-linked insurance for policyholders who are not self-selecting their investments. The FCA, however, decided only to lift the 35% cap for LTAF investments held in the default fund of an auto-enrolment scheme. It also opted to treat LTAFs as a non-mainstream pooled investment, which have greater restrictions on marketing to retail customers.

In its latest consultation document (87 pages / 1.07MB PDF), the FCA also proposed a series of reforms to the ‘permitted links’ rules in chapter 21 of the Conduct of Business Sourcebook (COBS 21) to broaden the access to LTAFs through defined contribution (DC) pensions that are structured as contracts of long-term unit-linked insurance.

The changes include freeing up access to conditional permitted LTAFs beyond auto-enrolment default funds, subject to the policyholder receiving regulated advice or management services in relation to the investment in LTAFs – except where self-investment in LTAFs takes place within an auto-enrolment scheme.

The FCA also plans to introduce a new category of conditional permitted illiquid assets, which can only be invested in by a linked fund included in an auto-enrolment default fund. Those assets would be defined as any asset with the same liquidity profile as a conditional permitted LTAF. The regulator intends for the change to create the level-playing field across illiquid investments that the working group had recommended.

Juan Jose Manchado of Pinsent Masons said: “It remains to be seen whether the working group will consider the proposed changes satisfactory. In some respects, only easing the access to other illiquid assets for auto-enrolment default funds falls short of the recommendation to do so across all situations where a pension scheme’s member is not self-selecting the investments.”

“Others may think that the proposals go too far by allowing members of auto-enrolment schemes to self-invest – outside the default option – in LTAFs without advice or cap. This is notwithstanding the protections offered by the insurer around liquidity mismatch, suitability and concentration risk monitoring,” he added.

The FCA also plans to treat LTAFs as restricted mass market investments (RMMIs), a new investment category introduced earlier this year. Retail investors who are not high-net worth or sophisticated may only invest in RMMIs after they have passed an appropriateness test and declared that they won’t invest more than 10% of their investable assets.

The FCA said the regulation that already applies to LTAFs at the product and fund manager levels made the new lighter distribution restrictions applicable to RMMI appropriate. It also proposed strengthening the regulation further by introducing rules around permissible fee types and unitholder engagement similar to those applicable to other retail funds.