The Financial Conduct Authority is consulting on draft rules that would see the newly minted long-term asset funds (LTAFs) available to a wider pool of retail investors.
Last October, the City watchdog greenlit the authorised fund structure, which received the backing of then-chancellor Rishi Sunak, as a way of circumventing liquidity issues in open-ended funds invested in long-term, harder-to-trade assets, such as private equity, property and infrastructure.
Up until now, the promotion of said vehicles, which have a minimum 90-day notice period, has only been available to professional investors. However, the FCA is considering broadening out the distribution to include retail investors and pension schemes “with certain restrictions”.
Regulatory changes for retail investors in less liquid funds have been anticipated. Janus Henderson pre-empted the proposals by selling its open-ended UK property fund to an unnamed single buyer earlier this year.
However, there is still some debate over whether there is genuine appetite for the LTAF and if the structure would be feasible for D2C platforms.
Some asset managers are insistent there is a place in the market for daily-dealing property funds, despite being met with heavy outflows.
See also: Majority of retail investors would ditch property funds if FCA implements notice periods
Restrictions for retail investors
Certain retail investors would be required to undertake appropriateness assessments to ensure they understand the risks and redemption terms before they are allowed to invest up to 10% of their portfolio in the LTAF.
The FCA is also consulting on proposals that would align some LTAF rules with the investor protection safeguards that apply to other authorised retail funds, including:
- -full engagement with unitholders about any proposed fundamental or significant changes to the fund
- -regular investor updates to be provided in the event of a suspension of dealing
- -arrangements for the conduct of unitholder meetings
- -restrictions on what types of payments and charges can be taken from LTAF unit classes made available to retail clients
Striking the right balance
Explaining its decision, the FCA said the LTAF could benefit retail investors by enabling them to have more diversified investment propositions, at a time when equity and bond markets have fallen in lockstep, provided they are “managed to appropriately high standards”.
But it also recognises “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”.
Nathan Long, senior analyst at Hargreaves Lansdown, was positive of the proposals, which were published alongside stricter rules to regulate the promotion of high-risk financial products.
“The FCA’s proposals for LTAFs use consumer-tested risk warnings, knowledge and experience checks and limits for those buying LTAFs to 10% of their portfolio.
“All in all, this is a thoroughly sensible set of measures and strikes the right balance between reducing detriment and providing investment opportunity.
“The obvious next step having clamped down on selling of higher risk investments is to free up the rules to better help firms explain mainstream investments to would be investors.”
