FCA probes 'unjustified barriers' to illiquid investments

FCA probes 'unjustified barriers' to illiquid investments

The Financial Conduct Authority (FCA) is examining ways to break down "unjustified barriers" to retail investments in illiquid assets as part of the government's drive to encourage investment into "patient capital".

In a consultation and discussion paper released this morning (December 12) the regulator said it wishes to consult on whether it can broaden the range of assets UK retail investment funds can acquire, while not materially increasing the risks faced by retail investors.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "We are proposing changes to allow retail investors greater access to long-term investment opportunities. 

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"We are also seeking views to help us identify any unnecessary barriers to investment in patient capital through authorised funds. We will ensure that any changes continue to provide an appropriate level of protection for consumers."

The FCA defines patient capital as "illiquid investments (including, for example, venture capital, infrastructure and corporate loans) intended to deliver long-term returns".

It warned: "These different elements of patient capital may have significantly different/higher risk profiles and this may in turn affect their suitability for retail investors."

The regulator wants to allow funds to choose investment opportunities that "match the investment needs of consumers more effectively".

It wants to enable a broader range of long-term investment through unit-linked funds. This is particularly in defined contribution pension funds where members invest via unit-linked funds. 

But it said it wants to increase confidence and participation in the market by providing an "appropriate degree of protection" for investors seeking to invest in illiquid or higher risk patient capital assets within unit-linked funds. 

It wants to reduce potential harm from a lack of consumer understanding of the type of assets that they hold and reduce risks that consumers may invest in products that do not fully reflect their investment needs.

This would be achieved by making investment and liquidity risks more transparent and requirements on authorised firms to take responsibility for ensuring that higher risk or more illiquid investments are only offered or taken up where it is suitable and appropriate for consumers and the purposes for which their investments are held.

With regards to unit-linked life policies, the FCA has proposed adding additional categories of conditional permitted links to supplement four of the five categories for those insurers who meet new conditions based on ensuring an enhanced level of investor protection.

Use of the expanded categories is also subject to a pre-condition that the provider firm ensures that the investments are suitable and appropriate for retail investors in the investment context in which they are being used.

The FCA's actions come in light of the chancellor announcing in 2016 the Patient Capital Review, which sought to explore whether the funding models for early stage companies were working efficiently.

The Treasury's review concluded that this part of the investment market was not working as well as it could be.

Changes to the rules governing investments in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) also happened as a result of this review, with the rules governing the types of investments these funds can access in exchange for the tax breaks received were tightened.