FCA to allow retail investors and DC self-select funds access to 'higher-risk' LTAFs

Long term assets funds (LTAF) are an open-ended collective investment asset introduced by the Financial Conduct Authority (FCA) in 2021.

They were designed to invest efficiently in long-term, illiquid assets, including venture capital, private equity and private debt, real estate and infrastructure but have preciously only been available to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals (HNWI). Additionally, pensions exposure to the LTAF was restricted to defined benefit (DB), and the default arrangement within qualifying defined contribution (DC) schemes.

The FCA said LTAFs were a higher risk product which could provide greater diversification to investment portfolios "in exchange for potentially higher returns but less immediate liquidity and longer redemption periods".

In its policy statement Broadening retail and pensions access to the long-term asset fund published today the FCA said LTAFs would be made more widely available to allow investment in what it called "productive finance".

The watchdog said it recognised that long-term investments were riskier so investors would need to be given clear risk warnings and customer assessments.

The FSCS and LTAFs

As well as these additional protections under the FCA’s high risk investment framework the regulator said it was seeking views on whether the protections of the Financial Services Compensation Scheme (FSC) should be available for LTAF investors or whether a different approach should be in place, before the products were available on the retail market. 

Sarah Pritchard, executive director, markets, for the FCA said the FCA had worked with the Bank of England, the Treasury and industry, through the Productive Finance Working Group to create an environment where investment in longer-term, less liquid assets, by investors who understand the risks, can flourish.

"The ability to invest in illiquid assets, through appropriately designed and managed investment vehicles, is important for supporting economic growth and the transition to a low carbon economy."

Extending LTAFs 'a mistake'

The Association of Investment Companies (AIC)claimed that widening the distribution of long term assets funds could be a mistake.

Richard Stone, chief executive of the AIC, used the example of the Woodford Equity Income Fund as evidence of the harm liquidity problems can cause to retail investors. He said: "Selling LTAFs to retail investors remains an accident waiting to happen. As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging."

Stone also said LTAF providers must be confident that arrangements will prevent liquidity mismatches and that retail investors will not be disadvantaged in comparison with institutions, who are known to react more swiftly to liquidity crunches than retail buyers.

He added it would be an early test of the incoming consumer duty regime: "Distributors will also have to be confident that they are allowing access to these products on an appropriate basis. The requirement for an appropriateness test and more specifically for investors to self-certify that they are investing no more than 10 per cent of their assets into these products is not enough. Indeed, the FCA’s own evidence shows that some investors self-certify when they do not meet the criteria."

Chris Cummings, chief executive at the Investment Association, was more welcoming of the FCA's decision. “This is an important step forward in broadening access to less liquid assets which can provide a valuable source of long-term returns for investors, enabling them to diversify their portfolios and achieve their financial goals. These investments in turn provide a valuable source of capital for the UK economy, funding infrastructure projects and powering long-term economic growth.”  

Long term assets funds: What the FCA is allowing

Previously, retail promotion of the LTAF was restricted to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals (HNWI). Additionally, pensions exposure to the LTAF was restricted to defined benefit (DB), and the default arrangement within qualifying defined contribution (DC) schemes.

The FCA is recategorising a unit in an LTAF from a non-mass market investment (NMMI) to a restricted mass market investment (RMMI).

This means that distribution will be extended so that mass market retail investors, as well as self select DC pension schemes and self-invested personal pensions (SIPPs) will be able to invest into an LTAF. 

Recategorisation to RMMI means firms marketing LTAFs to retail investors will need to provide risk warnings and summaries, and firms selling or arranging the sale of units in LTAFs will need to conduct an appropriateness assessment for all retail investors wishing to invest in the LTAF.

Unadvised retail investors will need to confirm that their exposure to investments subject to the RMMI rules (including LTAFs) is limited to 10 per cent of their investable assets. 

The FCA said the guidance was consistent with the aims of its Consumer Duty which requires firms to act to deliver good customer outcomes. The FCA said firms should also consider the duty’s rules and guidance, including under the consumer understanding outcome, when developing their approach.

The FCA said the move was in line with its three-year strategy, to provide fair value, confidence and greater access to financial markets.