The FCA has published a consultation paper (CP22/14) on broadening access to the long-term asset fund (“LTAF”) by retail investors and defined contribution pension plans. The proposals reflect his desire to see investing in long-term illiquid assets as a feasible option for a wider range of investors with long-term investment horizons who understand risk and can absorb losses. It is an attempt to strike a balance between reducing loss and risk and facilitating more investment opportunities.
Our previous article provides an in-depth analysis of LTAF, which is a new, distinct category of authorized open-end funds designed to allow professional investors to invest in long-term illiquid assets through an authorized fund vehicle.
What does the consultation say?
The FCA has outlined its proposals that would enable broader access to non-traditional and typically hard-to-reach investments, leading to portfolio diversification and potentially higher returns, while incorporating additional investor protections.
The main proposals include:
- Reclassification the LTAF as a restricted investment in the mass market (“RMMI”) based on the rules set out by the FCA in PS22/10 on strengthening financial promotion rules for high-risk investments. As it stands, the LTAF promotion is restricted to Professional Investors, Certified and Self-Certified Sophisticated Investors and Certified High Net Worth Individuals. Restricted retail investors could invest as long as they undertake suitability assessments to show they understand the risks and redemption terms before being allowed to invest up to 10% of their portfolio in LTAF. In addition, the regulator is proposing that restricted retail investors receive a specific risk warning, including specific references to investment horizon, liquidity and redemptions.
- Increase the exposure quantity funds of alternative investment funds may have in LTAF (up to a maximum of 50% of plan assets in LTAFs and 35% in an LTAF) and the disabling of the enhanced due diligence provisions under the COLL for FAIFs that invest in LTAFs.
- Alignment of some LTAF rules the investor protection rules that apply to other authorized retail funds, including:
- Full engagement with unitholders regarding any proposed fundamental or material change to the fund.
- Regular updates for investors should be provided in the event of a suspension of trading.
- Modalities for holding meetings of unitholders.
- Restrictions on the types of payments and charges that may be levied on the classes of LTAF units made available to retail clients.
- Removal of the 35% restriction on illiquid assets in unit-linked products, where the investor is an eligible default pension plan. This would give LTAFs a status equivalent to other illiquid assets, which would fulfill the conditions to ensure an appropriate degree of consumer protection.
The regulator notes that there would be no requirement for firms to produce and distribute LTAFs for retail investors, or for investors to only use LTAFs to invest in long-term illiquid assets. He also acknowledges that it may take some time before significant numbers of LTAF are produced and widely marketed.
The FCA also stressed the need for all companies that manufacture, manage or distribute LTAF to retail investors and customers to comply with the new consumer obligation.
We encourage readers to take note of a wider set of changes announced by the FCA separately on strengthening financial promotion rules for high-risk investments, as mentioned above.
Comments are welcome until October 10, 2022, after which the regulator intends to publish a final policy statement and final handbook rules in early 2023.
Article co-authored by Anna Burdzy