By Rachel Aldridge, managing director of UK regulatory and compliance solutions at IQ-EQ
Imagine a classroom where the same subject is taught to both beginners and advanced students—a useful metaphor for the challenge that private fund managers are facing as they democratise their offerings. It aptly captures the tension between simplicity and sophistication in the investment landscape as private markets evolve to accommodate a broader investor base.
The rulebook protecting retail investors is vast and risks creating a communication gap for more financially savvy investors who crave detail, nuanced information, and access to higher-risk, illiquid assets.
This dilemma is only accentuated by the regulatory pressures that require firms to ensure their communications are both clear and comprehensive – a balancing act that becomes more precarious as the investor base diversifies.
Expanding access to private markets
The shift in the private assets has led to the introduction of the UK’s Long Term Asset Fund (LTAF) and the European Long Term Investment Fund (ELTIF). These vehicles are intended to make illiquid alternative investments accessible to a wider audience.
While ELTIFs gained traction quickly, LTAFs are now growing in popularity. Major asset managers including Schroders, Aviva, and BlackRock have launched such funds, with further announcements expected in 2025. These developments reflect a significant move toward opening up private markets to retail investors, although challenges remain.
The Financial Conduct Authority (FCA) has been proactive in addressing these barriers. It’s chief executive Nikhil Rathi highlighted in October the need for further innovation in fund structures to meet the demand for long-term investments while ensuring robust safeguards for retail participants.
Balancing transparency and complexity
To attract retail investors, asset managers must embrace Consumer Duty and offer clear, understandable information for retail investors while ensuring they also produce the depth of information that their institutional audiences demand.
Even within the retail investor cohort, oversimplification is a concern. In their effort to make communications accessible to all, firms risk diluting the details. Simplified content may omit important nuances and industry terminology, akin to teaching only the basics when advanced investors are ready for more.
The FCA’s forthcoming review of its rulebook, including potential overlaps between existing rules and the Consumer Duty, highlights the need for firms to strike this balance effectively. The focus is on ensuring that retail investors can make informed decisions without being overwhelmed by excessive complexity or legalese.
However, achieving this clarity is easier said than done. The demand for transparency can, ironically, result in overwhelming documentation, with dense risk disclaimers and technical definitions that blur critical points.
At worst, regulation could slow the democratisation of private markets, as managers shy away from offering products to new sectors with enhanced fair value and customer outcome requirements.
This comes at a time when the UK government seeks to boost investment in UK businesses—a goal that fund managers could support. The LTAF, after all, was partly introduced to bring more capital to entrepreneurs, as well as to widen access to private investments.
The governance imperative
To navigate these challenges, firms aiming to meet retail investor regulatory obligations must embed strong governance frameworks. These should mandate continual product and service assessments, enabling asset managers to prove their offerings deliver fair value and align with consumer needs. Regular reviews, as highlighted by the FCA, will be crucial in ensuring funds meet evolving market expectations.
This regulatory responsiveness requires a consistent focus on insights from FCA reviews, particularly concerning fair value, and a commitment to using data to confirm that products meet customer expectations. Firms that proactively engage with these insights will not only ensure compliance but also position themselves as trusted partners for a diverse investor base.
Charting a way forward
As the investment options for retail customers expand, Consumer Duty will play an increasingly important role in shaping the wider private markets asset management landscape.
Moreover, as private markets continue to mature, the ability to cater to a broader range of investors without compromising on quality or clarity will be a defining factor. Firms that are able to balance growth, innovation, and investor protection will be the winners in the democratisation process.