Retail investors and pension schemes can now access Long-Term Asset Funds (LTAFs)

On 29 June 2023, the FCA published a policy statement (PS23/7) setting out its final rules on broadening access to the Long-Term Asset Fund (LTAF). The new rules which recategorise a unit in a LTAF from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI) came in to force on 3 July 2023 and will mean that mass market retail investors and defined contribution (“DC”) pension schemes can now invest in an LTAF. Affording greater investment in LTAFs should help to ensure product viability, although retail investment in LTAFs may be hampered not only by platforms’ reluctance to accommodate anything other than conventional daily dealing funds but by the fact that shares in LTAFs will not be ISA-able.

The LTAF, which is a relatively new category of open-ended fund, is discussed in one of our earlier articles.

What are the changes?  

The proposals in the FCA’s consultation paper (CP22/14) which we discussed in our previous article were largely met with agreement.  The main changes made by the FCA in response to consultation feedback are set out below.

The following changes have been made to the retail distribution and COLL rules:

• Risk warnings/ summary text rules are amended to focus more on liquidity risk rather than investment risk.
• Fund-of-funds exposure limits: A Non-UCITS Retail Scheme Fund of Alternative Investment Funds (NURS FAIF) is permitted to invest more than 50% of its scheme property into LTAFs (this was restricted to 35% in the consultation) as long as the NURS FAIF operates limited redemption arrangements to manage the liquidity mismatch. The NURS FAIF must be satisfied that the liquidity, redemption policies and dealing arrangements of any LTAF(s) in which it invests allows it to meet its redemption obligations. The NURS FAIF should also consider the liquidity of other assets in which it invests, which may result in NURS FAIFs having to operate limited redemption arrangements in circumstances where less than 50% of its scheme property is invested in LTAFs.
• Third-party valuation rules are amended in line with the valuation requirements for Non-UCITS Retail Schemes which are known to be workable.
• Retail investor protection rules: Some of the additional investor protection rules have been amended to align with the original policy intent. The original drafting applied these rules to LTAFs that have only professional, HNWI, certified sophisticated or self-certified sophisticated unitholders.  This was a mistake.

The following changes have been made to the pensions distribution rules:

• The exposure limit for self-select DC scheme investors has been extended to the higher of either 10% of the consumer’s total pension value or that of the default arrangement within the same qualifying scheme.
• Distribution has been expanded to include non-advised investors in long term unit-linked products including non-workplace schemes and non-qualifying workplace schemes.
• The final rules have been amended to remove the 35% restrictions on illiquid assets in unit‑linked fund structures within the default arrangement of a qualifying scheme. This is to reflect the policy intent of the consultation. The rule was omitted in error from the draft instrument.
• The FCA has clarified that consumers with exposure to LTAFs in self-selected pensions or SIPPs should receive a notification alerting them to the illiquid nature of their holdings as they approach retirement age. There is no new rule on this as it aligns with existing requirements to highlight relevant risk factors to investors as they approach retirement.

Removing Financial Services Compensation Scheme cover for LTAFs?

The FCA’s policy statement asks for feedback on removing FSCS protection for some or all LTAF activities and whether this should be done at pace at this early stage of LTAFs being distributed directly to retail investors. The proposals on FSCS coverage and consultation questions are set out in Chapter 4 of PS23/7.

The FCA intends this exclusion to be a first step ahead of a broader review of non-standard assets and the FSCS which shall be conducted in due course.

The consultation on FSCS cover closes on 10 August 2023.

Next steps

The new rules came into force on 3 July 2023. Authorised fund managers of funds that are already authorised as LTAFs have a transitional period to make the necessary changes to the relevant fund instruments and prospectus so that these documents reflect the new requirement in COLL 15.1.3R(4) (where it applies). The transitional period means that documents should be amended whenever they are next updated or by 3 July 2024 at the latest.

Any LTAFs already authorised that are structured as an Authorised Contractual Scheme must, if they intend to continue distributing to professional, sophisticated or HNW investors only, alter the contractual scheme accordingly.

It remains the case that any firm considering making an authorisation application for an LTAF should engage with the FCA prior to submitting an application. These pre-application discussions can help to pre-empt any areas of regulatory concern and can make the application process smoother.

Interest has picked up in the LTAF in recent months, following the launch of the first LTAF in April. If you would like to discuss any of these changes or are thinking about structuring an LTAF please get in touch and we can help you assess whether the LTAF is the right product for your fund range given your investment strategy and target market. We have Tier-One rankings in the UK’s Legal 500 Guide and our authorised funds team has significant experience in setting-up all forms of UK authorised funds across all asset classes. We would be happy to help.