FCA policy statement on broadening retail access to long-term asset fund

On 29 June 2023, the FCA published a policy statement on broadening retail access to the long-term asset fund (LTAF) (PS23/7).  

In this policy statement, the FCA is proceeding with final rules generally as consulted in CP22/14 which recategorises 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. 

The FCA is also consulting in chapter 4 of the policy statement on whether excluding Financial Services Compensation Scheme (FSCS) cover for the LTAF would be appropriate (as a first step toward change before the broader consideration of FSCS coverage for higher risk investments as part of the FCA's Compensation Framework Review).

What is changing?

Recategorisation to RMMI means that firms marketing LTAFs to retail investors will need to provide risk warnings and summaries, 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, and unadvised retail investors will need to confirm that their exposure to investments subject to the RMMI rules (including LTAFs) is limited to 10% of their investable assets. 

As a result of consultation feedback, the FCA is making the following changes to the retail distribution and COLL rules as consulted on (see our client note on the consultation here): 

• Risk Warning/ Summary text: Accepting the feedback that the proposed existing risk warning and risk summary over-emphasised investment risk, the FCA has amended the risk warning and summary in the final rules to focus more on liquidity risk. 

• Fund-of-funds exposure limits: As consulted, the FCA are permitting a Non-UCITS Retail Scheme Fund of Alternative Investment Funds (NURS FAIF) to invest up to 35% of the value of its scheme property into a single LTAF. The FCA had proposed prohibiting a NURS FAIF from investing over 50% of its scheme property into LTAFs. After consideration of the feedback, the FCA is allowing a NURS FAIF to invest more than 50% of its scheme property in LTAFs as long as the NURS FAIF operates limited redemption arrangements to manage the liquidity mismatch. The NURS FAIF must be satisfied that the liquidity, redemption policies and dealing arrangements of any LTAF(s) in which the NURS FAIF invests allows it to meet its redemption obligations. The NURS FAIF should also consider the liquidity of other assets in which it invests, which may result in NURS FAIFs having to operate limited redemption arrangements in circumstances where less than 50% of its scheme property is invested in LTAFs.

• Third-party valuation rules: In feedback, valuers considered that the rules (as consulted on) required them to make a judgement on consistency between the liquidity/ redemption profile of the LTAF and liquidity profiles of its portfolio real estate assets, leading to very conservative valuations. the FCA has therefore modified this rule in line with valuation requirements for the NURS, which is known to be workable.

• Retail investor protection rules: the FCA is also amending how some of the additional investor protection rules (that already apply to retail authorised funds) apply to LTAFs to align with its original policy intent. These additional rules are intended to provide additional protection for mass market retail investors and should not apply to LTAFs that have only professional, HNWI, certified sophisticated or self-certified sophisticated unitholders. In the draft rules annexed to the CP, some of these rules were extended to all LTAFs without modification, and the FCA has corrected this. 

The additional retail investor protection rules comprise: 

• full engagement with unitholders about any proposed fundamental or significant changes to the fund, including rules on change events relating to feeder LTAFs; 
• arrangements for the conduct of unitholder meetings; 
• arrangements for the register of unitholders; 
• restrictions on what types of payments and charges can be taken from LTAF unit classes made available to retail clients; and – regular investor updates to be provided in the event of a suspension of dealing.

The FCA is  also making the following changes to the draft pensions distribution rules as consulted in response to consultation feedback: 

• Self-select DC scheme exposure limit: changing the exposure limit for self-select defined contribution scheme investors. 
• Non-advised investors: expanding distribution to include non-advised investors in long term unit-linked products including non-workplace schemes and non-qualifying workplace schemes. 
• 35% illiquid assets limit: the final rules amended to remove the 35% restrictions on illiquid assets in unit‑linked fund structures within the default arrangement of a qualifying scheme, in line with the policy intent of the consultation. 
• Notification of Illiquidity: clarification that consumers with exposure to LTAFs in self-selected pensions or SIPPs should receive a notification alerting them to the illiquid nature of their holdings as they approach retirement age

Next Steps

The final rules come into force on 3rd July 2023.  The FCA is  encouraging firms who are considering making an authorisation application for an LTAF to engage with them prior to submitting an application.

Authorised fund managers of funds that are already authorised as LTAFs when the rules come into force will have a transitional period to make the necessary changes to the relevant instruments constituting the fund and prospectus so that these documents reflect the new requirement in COLL 15.1.3R(4) where it applies (i.e. in the context of schemes intended only for limited protection LTAF investors, or where there is a limited protection LTAF class). The effect of the transitional period is that Authorised Fund Managers (AFMs) will need to update the instrument constituting the fund and the prospectus whenever they are next updated or by 3 July 2024, whichever is earlier.

The FCA is seeking views from firms, to be submitted no later than 10 August, on the topic of whether excluding Financial Services Compensation Scheme cover for the LTAF would be appropriate and if there are any other actions that need to be taken, to allow the regulator to consider next steps before approval of any potential LTAFs that will promote to retail investors. 

You can find the FCA Policy Statement here.

For more detail read our client note here.

Our earlier client note on FCA consultation CP22/14 can be found here