LTAFs: new FCA rules extend access to retail investors

On 29 June 2023, the FCA published the much anticipated policy statement, PS23/7, "Broadening retail and pensions access to the long-term asset fund" (the PS).

This provides feedback on CP22/14 (August 2022) together with final rules. (For a summary of CP22/14, see our note here.)

The rules come into effect on Monday 3 July 2023.

To access our online LTAF resource, please click here.

What has the FCA decided?

In general, it will proceed with the proposals on which it consulted.

The headline news is that - as expected - a unit in an LTAF will no longer be categorised as a Non-Mass Market Investment (NMMI) but will, instead become a Restricted Mass Market Investment (RMMI).

The effect of this change is that:

• distribution can now be extended so mass market retail investors, as well as self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs) will be able to invest into an LTAF.
• firms marketing LTAFs to retail investors will have to provide risk warnings and summaries
• firms which sell or arrange the sale of units in LTAFs will need to conduct an appropriateness assessment for all retail investors wishing to invest in the LTAF and
• unadvised retail investors will be required to confirm that their exposure to investments subject to the RMMI rules (including LTAFs) is limited to 10% of their investable assets.

These measures are intended to reduce the chance that retail investors might invest in an LTAF without a strong understanding of the risks.

However, the FCA has made some changes to its original proposals

• Risk summaries: accepting that the previous summaries "overemphasised investment risk, rather than liquidity risk specifically", the FCA has amended the risk warning and summary in the final rules to provide a greater focus on liquidity risk;

• Fund of Fund exposure limits: as proposed in CP22/14, a NURS FAIF will be able to invest up to 35% of the value of its scheme property into a single LTAF.

  However, the FCA has reversed its proposed prohibition against a NURS FAIF investing more than 50% of its scheme property in LTAFs - this will now be permitted provided the NURS FAIF

  • operates limited redemption arrangements to manage the liquidity mismatch and
  • is satisfied that the liquidity, redemption policies and dealing arrangements of any LTAF(s) in which the NURS FAIF invests allows it to meet its redemption obligations;

• Changes to third party valuation rules: feedback received to the CP suggested that valuers considered felt the FCA's proposed rules would require them to make a judgement on consistency between (on the one hand) the liquidity/ redemption profile of the LTAF and (on the other hand) liquidity profiles of its portfolio real estate assets, which could lead to very conservative valuations. Taking this on board, the final rules have been modified in line with NURS valuation requirements, "which is known to be workable";

• Additional retail investor protections: these include

  • full engagement with unitholders about any proposed fundamental or  significant changes to the fund, including rules on change events relating to feeder LTAFs;
  • arrangements for the conduct of unitholder meetings;
  • arrangements for the register of unitholders;
  • restrictions on what types of payments and charges can be taken from LTAF unit classes made available to retail clients; and
  • regular investor updates to be provided in the event of a suspension of dealing

  The PS notes that these additional rules are "intended to provide additional protection for mass market retail investors and should not apply to LTAFs that have only professional, HNWI, certified sophisticated or self-certified sophisticated unitholders". (In the CP, some of these rules had been extended to all LTAFs - this has been corrected.)

• Notification of Illiquidity: consumers with exposure to LTAFs in self-selected pensions or SIPPs will now receive notification alerting them to the illiquid nature of their holdings as they approach retirement age.

Next steps?

The new rules and guidance will come into force on 3 July 2023.

An Authorised Fund Manager (AFM) of an LTAF already authorised as at that date will have a transitional period to make the necessary changes to the fund's constitutional documents and prospectus so that these documents reflect the new requirement in COLL 15.1.3R(4) where it applies.

As a result, the AFM must update the instrument constituting the fund and the prospectus "whenever they are next updated or by 3 July 2024, whichever is earlier".

An authorised LTAF which is structured as an Authorised Contractual Scheme (ACS) must alter its contractual scheme deed (as per s261Q FSMA) appropriately where it intends to continue distributing to professional, sophisticated or HNWI only.

The PS also includes, in Chapter 4, questions on whether excluding Financial Services Compensation Scheme (FSCS) cover for the LTAF would be appropriate. Responses are invited on this point until 10 August 2023. If the FCA decides to take the proposal further, it will consult later in 2023.

What's the background to the PS?

Until now, promotion of the LTAF to retail has been restricted to

• professional investors,
• certified and self-certified sophisticated investors and
• certified high net worth individuals (HNWI).

It was always intended that (subject to appropriate investor protection rules being in place) LTAFs should be a viable option for investors with long-term investment horizons who understand and can bear the risks of such investments.

In August 2022, the FCA consulted (in C22/14) on proposals for broadening the retail and pensions distribution of the LTAF to more categories of retail investors and policyholders, whilst including further investor protections.

The main proposal was to treat the LTAF as a RMMI, in line with the FCA's approach for high-risk investments under PS22/10, "Strengthening our financial promotion rules for high-risk investments". See here for our summary of PS22/10

It was felt that the RMMI regime offers additional protections including risk warnings and restricting the amount that retail investors can invest compared to the LTAF's previous distribution rules.

The PS notes that there is significant work underway on possible reforms to retail access to investments more broadly and on where responsibility for risk should lie (i.e., with firms or with consumers) for those seeking high risk investments.

This work includes DP22/6: Future Disclosure Framework as well as DP23/2: Updating and improving the UK regime for asset management.

For our summary of SP22/6 see here; for a summary of DP23/2, see here.