The FCA has published a consultation paper with proposals to broaden distribution of the long-term asset fund (the “LTAF”) to retail investors in the UK subject to certain restrictions, as well as increasing the amount of exposure that some other authorised retail funds can have to the LTAF. The paper also proposes modifications to broaden pension scheme coverage. The consultation was published alongside a policy paper with a wider set of changes to strengthen financial promotion rules for high-risk investments aimed at consumers.
The LTAF regime came into force on 15 November 2021, and it is fair to say it has had a slow start. While there have been a few aspects feeding into that, not least that it takes time to build an entirely new product and corresponding distribution channels, the ongoing review of the DC charge cap has no doubt been a factor. The consultation outcome published in March 2022 is the latest in a number of workstreams on this topic, in which the government noted it intends to progress with a proposal to exclude “well-designed” performance fees from the 0.75 per cent. cap on charges in default arrangements, but given mixed feedback in that consultation, it will do so only after further consultation.
Our note on the LTAF is available here.
Broadening retail investment coverage
- Classification as a ‘Restricted Mass Market Investment’
When creating the LTAF regime, the FCA indicated its intention was to do so in two stages – focusing initially on the framework for distribution to professional, high net worth and sophisticated investors (mostly targeted at DC pension scheme default arrangements), and then consulting on broadening access to retail at a future date.
The FCA is currently proposing to classify the LTAF as a ‘restricted mass market investment’ (“RMMI”), in line with its new financial promotion rules (see our note here). This means that restricted retail investors would be able to invest up to 10 per cent. of their investable assets into an LTAF or other RMMI products (in total). There will be additional controls built in for such an audience, including specific risk warning wording and risk summary templates, and the FCA has proposed language within the consultation for an LTAF.
- Additional protections for retail investors
The LTAF framework was initially modelled on the Qualified Investor Scheme, however the FCA considers it appropriate to make modifications to the rules for those LTAFs which are offered to a retail audience. The FCA intends to do so by extending some of its mainstream retail fund rules i.e., those which apply to UK UCITS and Non-UCITS Retail Scheme (“NURS”), including:
- the requirement to maintain a detailed register of investors (depending on the type of vehicle);
- a framework around the charging of performance fees and other payment rules;
- enhanced disclosure rules, including provision of a packaged retail investment and insurance-based product (PRIIPs) key information document;
- investor approval for certain changes; and
- fund suspension rules to be aligned.
All firms that manufacture, manage or distribute an LTAF to retail investors and retail clients must comply with the Consumer Duty – see our webpage on the consumer duty here.
- DOFP rules and appropriateness assessment
The FCA’s direct offer financial promotion (DOFP) rules apply to the LTAF as an RMMI. This means that any firm making a promotion about an LTAF directly to a retail investor will need to make sure it has categorised the investor (i.e., determined what type of investor it is and obtained any relevant declarations from that investor about its status) and provided the investor with a personalised risk warning, prior to making the promotion. It will also need to carry out an assessment about whether the LTAF is appropriate for that investor. This process is described in more detail in our separate note.
In its consultation, the FCA notes that the appropriateness test looks at the investor’s knowledge and experience in the relevant investment field, and only needs to be carried out if the investor is non-advised.
- NURS FAIFs
The FCA proposes to amend the rules applicable to NURS Funds of Alternative Investment Funds (“FAIFs”) to permit them to invest up to a maximum of 35 per cent. in a single LTAF, provided that certain requirements are met. Namely, that the LTAF’s liquidity, redemption policy and dealing arrangements (as part of the overall portfolio of assets held in the FAIF) must be sufficient for the FAIF to be able to meet its obligations in respect of redemptions, and, if appropriate, the manager of the FAIF must have considered how many second schemes the FAIF should invest in to ensure that it can meet its redemption obligations (including ensuring that the timing of valuations align).
The FCA proposes to disapply existing NURS FAIF due diligence requirements for LTAFs, given the level of investor protection built into LTAFs. The FCA also proposes capping the amount a FAIF can invest in LTAFs at 50 per cent of NAV, to stay under the Funds with Inherently Illiquid Assets (FIIA) threshold.
The FCA understands that units in an LTAF are not a qualifying investment for a Stocks and Shares individual savings account (ISA) due to their notice period of at least 90 days, however the FCA acknowledges that some market participants consider ISA eligibility could facilitate widening access to the LTAF. The FCA advises that this is a tax matter for HM Treasury and HMRC.
Broadening pension scheme coverage
The FCA is proposing to amend the rules for unit-linked products (the “permitted links” rules) to extend the distribution of LTAFs and other illiquid assets to members of DC pensions schemes and more widely by:
- permitting the broadening of the distribution of LTAFs via self-select options in qualifying schemes (subject to guidance stating the insurer must satisfy itself that protections are in place to prevent investors over-exposing themselves to the LTAF-linked fund);
- extending the distribution of LTAFs where investors in a long-term unit-linked product have appropriate professional support on fund selection; and
- giving equivalent status to that currently afforded to LTAFs via the permitted links rules to other illiquid assets where the unit-linked product is part of the default arrangements of a qualifying scheme (where conditions for securing an appropriate degree of consumer protection can be met).
The FCA suggests that, given its (at least) 90-day notice period for redemption, the LTAF would be considered a non-standard asset for self-invested personal pensions (SIPPs).
The consultation closes on 10 October 2022. The FCA expects to publish its final rules in early 2023.
Financial promotion in the UK
The UK’s financial promotion regime is being looked by the government and the FCA. In addition to the policy statement on high-risk investments mentioned earlier, we are awaiting the outcome of a HM Treasury consultation on the high net worth and sophisticated investor exemptions (here). In particular, the government is proposing to recalibrate the exemption thresholds for inflation, and related risk and experience to ensure that they are relevant and appropriate, since it is over 20 years since they were introduced. There is also separate work at both government and FCA-level on a regulatory “gateway” for approvers of financial promotions.
For further information, please contact:
Matthew Keogh, Partner, Linklaters