The Financial Conduct Authority (FCA) has set out rules to give retail investors and more defined contribution (DC) pension schemes access to Long Term Asset Funds (LTAF).
The LTAF is a newly created type of open-ended authorised fund, which the UK regulator introduced in 2021, designed to invest efficiently in long-term, illiquid assets, such as venture capital, private equity and private debt, real estate and infrastructure.
LTAFs are a higher risk product – that can provide greater diversification to investment portfolios in exchange for potentially higher returns but less immediate liquidity and longer redemption periods.
To help protect consumers, LTAFs will be subject to additional protections under the FCA’s high risk investment framework, including risk warnings and customer assessments.
The FCA is also seeking views on whether the protections of the Financial Services Compensation Scheme (FSCS) should be available for this product, or whether a different approach should be in place, before LTAFs get to the retail market.
‘Good alternative returns’…
Sarah Pritchard, executive director of markets at the FCA, said: “Longer-term less liquid real assets can generate good alternative returns for investors and, crucially, help to grow the UK economy through investments, such as new infrastructure.
“Our new rules allow retail investors, and pension funds, to invest in productive finance, but they also recognise that long-term investments can be riskier. That is why people will be given clear risk warnings and customer assessments, in line with other higher risk products.”
The FCA has worked with the Bank of England, the Treasury and industry, through the Productive Finance Working Group to create an environment where investment in longer-term, less liquid assets, by investors who understand the risks, can flourish.
The UK regulator said that the “ability to invest in illiquid assets, through appropriately designed and managed investment vehicles, is important for supporting economic growth and the transition to a low carbon economy”.
Chris Cummings, chief executive at the Investment Association, welcomed the announcement, calling it an important step forward in broadening access to less liquid assets. Cummings said such assets could provide a valuable source of long-term returns for investors, enabling them to diversify their portfolios and achieve their financial goals.
“These investments in turn provide a valuable source of capital for the UK economy, funding infrastructure projects and powering long-term economic growth,” he added.
…Or a ‘mistake’
However, Richard Stone, CEO of the Association of Investment Companies (AIC), said the decision to extend distribution of LTAFs could prove to be a mistake.
“The Woodford Equity Income Fund, and problems in the open-ended property sector, have shown how much harm liquidity problems can cause to retail investors. Selling LTAFs to retail investors remains an accident waiting to happen.
“As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging,” he said.
“Of course, investors should have access to productive assets and illiquid assets. But creating a new structure with inherent liquidity mismatches is not the answer. Investment companies have been around for over 150 years and are a proven investment vehicle already providing access to these asset classes,” Stone added.
This story originated on our sister publication, International Adviser.
