The UK regulator has proposed a “costly, complex and difficult-to-apply” workaround for European rules on investor classification, according to the Pensions and Lifetime Savings Association (PLSA).

The Financial Conduct Authority (FCA) yesterday closed its fourth consultation on the implementation of the Markets in Financial Instruments Directive (MiFID II).

The directive classifies all local authorities as retail investors in an effort to protect small treasury managers from being mis-sold complex investment products.

But in the UK, treasury managers are often also responsible for managing local government pension scheme (LGPS) assets, including alternative and illiquid asset classes.

The rules could damage the government-endorsed pooling project underway across the LGPS.

The 89 LGPS funds in England and Wales have created eight asset pools aimed at improving efficiencies and increasing investment in UK infrastructure, but the PLSA warned that the MiFID II rules threatened to limit access to such asset classes and urged the regulator to make an explicit exemption for the pools.

The FCA proposed amendments to its existing handbook allowing local authorities fitting certain criteria to be considered as professional clients through “elected professional status”.

But the PLSA, which represents pension funds, said the plan was too complex and risked significant disruption to LGPS funds’ investment strategies.

The Local Government Association has expressed fears LGPS funds would be forced into a fire sale of assets without an adequate resolution.

In its response to the consultation, the PLSA said LGPS funds would be forced to go through a “significant and time-consuming process that … provides no guarantees that future investment strategies will be able to be effectively executed with existing managers or existing terms”.

Graham Vidler, director of external affairs at the PLSA, said: “The FCA needs to consider that local government pension funds have significant levels of investment expertise, a robust track record of effective risk management in investments and considerable experience across a wide range of asset classes, including infrastructure.

“Reclassifying local authority pension funds as retail investors will prevent them from investing in certain asset classes such as infrastructure.

“With LGPS funds investing billions in infrastructure right now, and at a time when the government is calling for greater infrastructure investment by pension funds, these proposals are counterintuitive.”

As the MiFID rules require individual asset managers to assess their clients’ retail or professional status, pension funds would be required to prove their suitability multiple times for various asset classes and managers.

The PLSA said: “The reclassification of local authorities as retail investors is unnecessary, does not reflect the experience and expertise of local government pension funds and will have serious implications for their ability to effectively manage their investments in line with their pension fund liabilities.

“It will also severely impact their ability to invest in certain asset classes, such as infrastructure – a stated objective of government …. Therefore, we recommend the FCA distinguish between the investment activity of local authorities and local authority pension funds, so the latter may retain its per se professional client status to continue its effective investment strategies.”

The FCA’s consultation paper is available here, while the PLSA’s press release is available here.

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