Regulator aims to broaden access to non-listed investments, including by DC pensions schemes 

The UK’s Financial Conduct Authority (FCA) has launched a consultation on broadening access to the Long Term Asset Fund (LTAF), the UK fund vehicle designed to facilitate investment into non-listed assets.

The FCA is seeking contributions from market participants to design “draft rules to market the Long Term Asset Funds (LTAFs) to a wider group of retail investors and pension schemes”, according to the authority’s website.

“There is a risk that retail investors may be overly reassured by the fund’s authorised status or not fully understand the illiquid nature and corresponding risk of the underlying assets.

“We designed robust governance requirements around the LTAF satisfying appropriate regulatory standards to enable investors who understand the risks of investing in long-term illiquid assets to invest with confidence,” said the FCA.

However, the authority added: “We do not want to impose unnecessary restrictions on where consumers can invest. We want investors to be able to access suitable investments that match their attitude to risk.”

The LTAF, an open-ended vehicle, was originally proposed by the UK’s Investment Association in 2019 and the FCA set out the regulatory regime in October last year. The structure loosely mirrors the European Long-Term Investment Fund (ELTIF) regime.

The consultation sets out specific proposals for broadening the retail distribution of the LTAF to more categories of retail investors, while including further investor protections.

The FCA proposes to treat the LTAF as a ‘Restricted Mass Market Investment’ (RMMI), enabling a broader range of retail investors to access the vehicle whilst ensuring they understand the risks involved and can absorb potential losses.

However, the FCA included potential institutional investors in long-term asset funds, like pension providers and trustees of DC or hybrid pension schemes, as well as asset managers, in the list of market participants concerned with the consultation. 

It is therefore hoped that the structure will unlock more investment in illiquid assets by defined contribution (DC) schemes.

“This is important because it could help further the trend towards democratising ownership of private assets, and help the government advance its aim of economic growth and net zero emissions,” said Lora Froud, partner at UK law firm Macfarlanes.

“It’s important that retail access is based on strict protections. Some of these are inherent to the LTAF, such as its governance requirements that go beyond other regulated funds, which give good grounds to broaden access,” she added.

“We have also proposed a series of objective tests for distributors to apply. The FCA has adopted similar measures, such as a portfolio diversification test and a tailored LTAF risk disclosure. The details about how the Restricted Mass Market Investments [RMMI] category works will be important, but this is surely the right starting point.”

According to Macfarlanes, the FCA had previously lifted the 35% limit on a DC scheme’s investment in LTAF-linked funds via the default option. The consultation proposes to extend the policy to self-selected options. This means that if a scheme member opts for a non-default option invested in an LTAF, the 35% limit would not apply.

“This initiative seems designed to treat default and non-default scheme members equivalently, although it might also seek to circumvent the concern that some pension trustees might be reluctant to put their scheme members into less liquid investments via the default option,” said Gavin Haran, head of policy for asset management at Macfarlanes.

The FCA has set a deadline of 10 October for receiving answers from market participants, and a final policy statement and handbook rules are expected early next year.

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