The FCA has published a consultation paper (CP22/14) on broadening access to the long-term asset fund (“LTAF”) regime by retail investors and defined contribution pension schemes. The proposals reflect its wish to see investment in long-term illiquid assets as a feasible option for a wider range of investors with long-term investment horizons who understand the risk and can absorb any losses. This is an attempt to strike a balance between reducing loss and risk and facilitating more investment opportunities.
Our previous article provides in-depth discussion of the LTAF, which is a new, distinct category of authorised open-ended fund, designed to enable professional investors to invest in long-term illiquid assets through an authorised fund vehicle.
What does the consultation say?
The FCA has set out its proposals which would allow wider access to non-traditional and usually hard to reach investments resulting in portfolio diversification and potentially higher returns, while incorporating further investor protections.
Key proposals include:
- Reclassifying the LTAF as a restricted mass market investment (“RMMI”) based on the rules set out by the FCA in PS22/10 on strengthening financial promotion rules for high-risk investments. As it stands, LTAF promotion is restricted to professional investors, certified and self-certified sophisticated investors, and certified high-net-worth individuals. Restricted retail investors would be able to invest as long as they undertake appropriateness assessments to show they understand the risks and redemption terms before they are allowed to invest up to 10% of their portfolio in the LTAF. Further, the regulator proposes that restricted retail investors should be shown a specific risk warning, including specific references to investment horizon, liquidity and redemptions.
- Increasing the amount of exposure that Funds of Alternative Investment Funds can have to the LTAF (up to a maximum of 50% of scheme property in LTAFs and 35% in any one LTAF) and switching off enhanced due diligence provisions under COLL for FAIFs which invest in LTAFs.
- Aligning some LTAF rules with the investor protection rules that apply to other retail authorised funds including:
- Full engagement with unitholders about any proposed fundamental or significant changes to the fund.
- Regular investor updates to be provided in the event of a suspension of dealing.
- Arrangements for the conduct of unitholder meetings.
- Restrictions on what types of payments and charges can be taken from LTAF unit classes made available to retail clients.
- Removing the 35% restriction on illiquid assets in unit-linked products, where the investor is a qualifying default pension scheme. This would give LTAFs equivalent status to other illiquid assets, which would meet the conditions for securing an appropriate degree of consumer protection.
The regulator notes that there would be no obligation for firms to produce and distribute LTAFs for retail investors, or for investors to use only LTAFs to invest in long-term, illiquid assets. It also recognises that it may take some time before a significant number of LTAFs are produced and widely marketed.
The FCA has also emphasised the need for all firms that manufacture, manage, or distribute LTAFs to retail investors and clients to comply with the new Consumer Duty.
We encourage readers to take note of a wider set of changes announced by the FCA separately on strengthening the financial promotion rules for high-risk investments as mentioned above.
Feedback is welcomed until 10 October 2022 after which the regulator intends to publish a final policy statement and final Handbook rules in early 2023.
Article co-authored by Anna Burdzy