FCA’s Mistaken Policy over Long-term Asset Funds

The Financial Conduct Authority (FCA) have released a “policy statement” containing proposals for new long-term asset funds and their regulation. See PS23/7 (https://www.fca.org.uk/publications/policy-statements/ps23-7-broadening-retail-access-long-term-asset-fund ).

The plan is that distribution of these open-ended funds will be extended to mass market retail investors. Self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs) will be able to invest into an LTAF. 

The LTAF is a new category of authorised open-ended fund specifically designed to invest efficiently in long-term, illiquid assets. Illiquid assets include venture capital, private equity, private debt, real estate and infrastructure. The FCA claims that they can provide a useful alternative investment opportunity for consumers able to bear the risks of such investments. They also say that “an ability to invest in long-term illiquid assets, through appropriately designed and managed investment vehicles such as the LTAF, is also important in supporting economic growth and the transition to a low-carbon economy”. But don’t private equity investment trusts already provide this?

This is surely an accident waiting to happen, particularly as it is proposed to exclude such funds from the Financial Services Compensation Scheme (FSCS).

The FCA also states that “While these investments can have a higher risk of loss than diversified portfolios of listed equities or bonds, they can also potentially deliver higher long-term returns in exchange for less liquidity”. Where is the evidence for this? Selling illiquid investments to retail investors via open-ended funds is a recipe for mis-selling claims and significant losses as we have seen with some property funds for example.

The AIC has come out strongly opposed to these proposals – see their press release here: https://www.theaic.co.uk/aic/news/press-releases/selling-ltafs-to-retail-investors-could-prove-to-be-a-mistake . To quote from it: “As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging”.

Has the FCA consulted experienced private investors before proposing these measures? Or is it being supported solely by financial institutions wanting to sell more such funds?

The proposed regulations of LTAFs are very complex and are unlikely to be understood by private investors while it is not even clear that they will qualify for ISAs.  

Private investors should respond to the FCA’s public consultation on these proposals – available from the first link above.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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