On 12 December 2018, the FCA published a consultation paper, CP18/40, on potential changes to its permitted links rules in the Conduct of Business (COBS) sourcebook 21.3. The proposed measures aim to address potential barriers to investment by retail investors in patient capital.

Patient capital refers to a broadly defined range of illiquid investments (including, for example, venture capital, infrastructure and corporate loans) intended to deliver long-term returns. These different elements of patient capital may have significantly different/higher risk profiles and this may in turn affect their suitability for retail investors. 

The FCA is proposing amendments and additions to the permitted links rules in COBS 21.3 and relevant related rules in four broad areas, which it details in chapter 3 of the consultation paper:  

  • clarification of existing requirements: the FCA provides information around existing permitted links requirements to clarify its expectations in areas where the interpretation of its rules is perceived as a barrier to patient capital investment;
  • revised wording to broaden investment range: for insurers which are able to meet conditions which provide an enhanced degree of investor protection, the FCA proposes to add additional conditional permitted links categories which supplement the existing range of permitted links (for example, a new category of conditional permitted immovables in addition to the existing category of "permitted land and property"- COBS 21.3.1R(2)(d) to facilitate investment in, for example, a wider range of permitted infrastructure projects);
  • new limits: the FCA also proposes to set a new limit requiring that overall investments in illiquid assets in a linked fund should comprise no more than 50% of total assets for firms meeting the new conditions. The FCA says that the proposed changes will remove, and therefore allow these firms to exceed, the current limits for individual permitted links categories as long as they do not exceed the overall threshold limit. This is to enable flexibility in the choice of illiquid assets. For firms which do not meet the investor protection conditions, there will be no change to current limits;
  • risk mitigations: the FCA proposes to introduce appropriate risk warnings to help consumers understand the investment and liquidity risks involved. It also proposes a requirement on firms using the greater flexibilities afforded by its proposed changes to ensure that investments in more illiquid or risky assets are only offered/taken up where it is suitable and appropriate. This includes firms taking responsibility for ensuring that linked policyholders are not prevented from exercising their rights under their unit-linked policies because of the nature of the assets to which their policy returns are linked.

Comments are requested by 28 February 2019. The FCA plans to publish a policy statement and, where relevant, make its final rules and guidance later in 2019

The FCA has also published a discussion paper in order to explore the impact on its regulatory regime on investment in patient capital through authorised funds, see item below.