FCA consults on broadening retail access to the long-term asset fund (“LTAF”) to retail investors (CP22/14)
In line with what can be seen as a wider focus, the FCA has published a consultation paper that proposes to broaden the distribution of the long-term asset fund (the “LTAF”) to retail investors in the UK. However, this will be subject to certain restrictions in addition to increasing the amount of exposure that some other authorised retail funds can have to the LTAF. Also contained in the paper are proposals and modifications to broaden pension scheme coverage. There is a direct correlation with recently published rules strengthening financial promotion requirements for high-risk investments aimed at retail consumers.
To place this into context, the LTAF regime came into force on 15 November 2021 and had a rather underwhelming start. This was in no small part attributable to the inevitable hurdles in building an entirely new product and corresponding distribution channels and resultant distribution cap charges.
Classification as a ‘Restricted Mass Market Investment’
The FCA signalled when creating the LTAF regime that the intention was to do so in two stages:
- Focusing initially on the framework for distribution to professional, high net worth and sophisticated investors
- Subsequent consultation on broadening access to retail at a future date
The FCA currently proposes to classify the LTAF as a ‘restricted mass market investment’ (“RMMI”), in line with its new financial promotion rules. As a direct result, this means that restricted retail investors would be able to invest up to 10% of their total investable assets into an LTAF or other RMMI products. Additionally, there will be controls built in for such an audience, including specific risk warning wording and risk summary templates. The FCA has accordingly proposed language/guidance within the consultation for an LTAF.
Additional protections for retail investors
The LTAF framework was initially modelled on the Qualified Investor Scheme. However, the FCA considers it appropriate to make modifications to the rules for those LTAFs which are offered to a retail audience. The FCA intends to do so by extending some of its mainstream retail fund rules i.e., those applicable to UK UCITS and Non-UCITS Retail Scheme (“NURS”), including:
- The requirement to maintain a detailed register of investors (depending on the type of vehicle)
- A framework around the charging of performance fees and other payment rules
- Enhanced disclosure rules, including provision of a packaged retail investment and insurance-based product (PRIIPs) key information document
- Investor approval for certain changes; and
- Fund suspension rules to be aligned
All firms that manufacture, manage, or distribute an LTAF to retail investors and retail clients must comply with the new Consumer Duty.
DOFP rules and appropriateness assessment
The FCA’s Direct Offer Financial Promotion (DOFP) rules will apply to the LTAF as an RMMI.
In the consultation, the FCA notes that the appropriateness test looks at the investor’s knowledge and experience in the relevant investment field, and importantly only needs to be carried out if the investor is non-advised.
The FCA proposes to amend the rules applicable to NURS Funds of Alternative Investment Funds (“FAIFs”) to permit them to invest up to a maximum of 35 % in a single LTAF, provided that certain requirements are met with a particular focus on applicable redemption.
Given the level of investor protection built into LTAFs, the FCA proposes to disapply existing NURS FAIF due diligence requirements for LTAFs.
The FCA understands that units in an LTAF are not a qualifying investment for an ISA. However, the FCA advises that this is a tax matter for HM Treasury and HMRC.
Broadening pension scheme coverage
The FCA is proposing to amend the rules for unit-linked products (the “permitted links” rules) to extend the distribution of LTAFs and other illiquid assets to members of DC pensions schemes and more widely.
Clearly, the FCA sees a future for LTAFs and this can be seen as a good thing. What is apparent is that the FCA continues to focus, as it should, on the consumer.
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The full consultation paper can be found here