Sophisticated investors and pension funds are among those who will have access to new types of investment opportunities following changes made by the Financial Conduct Authority.
The FCA has confirmed that it will be taking forward proposals to create a new type of open-ended authorised investment fund which will help support investment in assets like infrastructure and private equity. Investment in these assets has the potential to generate better returns for investors, including those saving for retirement in defined contribution (DC) pension schemes and appropriately managed, can also benefit the wider economy by supporting the economic recovery from Covid-19 and supporting financial stability.
Currently, some investors are unable, or unwilling, to invest in long-term assets, even though these assets could meet their investment goals.
Nikhil Rathi, Chief Executive of the FCA, said:
'We are supporting fresh collaborative thinking designed to improve the effectiveness of UK markets while protecting standards. If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy.'
The new rules create a Long-Term Asset Fund (LTAF) regime, a new FCA regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.
As investments in this type of fund may take longer to sell, the FCA has put in place rules to ensure there is a consistency between how long it will take to sell assets and how often and quickly an investor will be able to sell out of the fund.
The LTAF is aimed at DC pension schemes which may be interested in investing, in line with their investment horizons and risk appetite. It also offers long-term investment opportunities to sophisticated investors and some high-net-worth individuals.
The FCA will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors. While this would potentially open a controlled route for retail investors to higher risk assets than some of the other routes currently available such as unauthorised funds, safeguards would also be needed to ensure retail investors understand the risks involved. Next year’s consultation will set out proposals for how this could be achieved.
The LTAF structure is one of the FCA’s wholesale market priorities as set out in its Business Plan 2021-22 and marks its commitment as a regulator to being more innovative, assertive and adaptive.
The LTAF regime was committed to by the Chancellor in his statement to Parliament on the Financial Services bill on 9 November 2020, and the fund and its operation formed part of the recommendations of the Productive Finance Working Group’s (PFWG) roadmap, published in September 2021. The FCA worked with the PFWG as part of its consultation process on these rules.
Notes to editors
- Read PS21/14[1].
- Productive Finance Working Group recommendations[2]
- The changes to the permitted link rules will enable pension schemes to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.
- A recent survey[3] commissioned by the Department for Work and Pensions (DWP) found that two thirds of these schemes do not invest in illiquid assets, while the remaining third invest between 1.5% and 7%.
- Establishing the right framework for long-term asset funds (LTAFs) was one of our wholesale market priorities as set out in our Business Plan 2021-22
- Find out more information about the FCA[4].