Industry split on FCA's potential illiquid fund expansion

Industry split on FCA's potential illiquid fund expansion

An industry body has hit out at the regulator’s proposal to open up a long-term illiquid asset fund to retail investors, saying it is an “accident waiting to happen”.

Richard Stone, chief executive officer at the Association of Investment Companies, said the industry has a “poor record” of safely making illiquid assets available to consumers within open-ended funds.

The long-term asset fund was launched last October to give sophisticated investors and defined contribution pension schemes access to illiquid or long-term assets, such as infrastructure, private equity and real estate. 

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The funds have a notice period for redemptions of 90 days, and must have at least 50 per cent of their assets invested in unlisted securities or other long-term assets. 

Under the changes proposed by the FCA, and to which the AIC was responding, a unit in an Ltaf would be recategorised as a restricted mass market investment which would allow restricted investors to invest in them alongside high net worth and sophisticated investors.

The regulator opened a consultation in August, saying it wanted investment in long-term illiquid assets to be a viable option for retail investors with long-term investment horizons who understand the risks of these products.

As a result it was proposing that the funds should become available to retail investors categorised as 'restricted'.

Restricted investors are those who sign a statement agreeing not to invest more than 10 per cent of their assets into non-readily realisable securities - a category originally introduced as part of the FCA's regulation of peer-to-peer investing.

“Ltafs are likely to repeat these failings, as minimum notice periods will not prevent liquidity mismatches which will be particularly harmful to retail investors,” Stone said.

He added that since the rules for Ltafs were introduced, no products have been launched. 

“Widening Ltaf distribution to retail investors before products have been launched and proven and before proper standards have been imposed is inviting trouble,” he said.

However, independent consultant John Forbes said the FCA has clearly given “considerable thought” to opening up investment in the Ltafs.

“In this consultation, and the previous one, they have made it clear that unrestricted marketing to the general public was never on the cards,” he said.

“Allowing professionally advised retail investors and retail investors coming in via other funds and tightly regulated products is eminently sensible and, in my view, no different from investment by defined contribution pensions schemes or unit linked insurance products.”

The consultation has come at a similar time to a number of measures the FCA is proposing around the financial promotion rules for high-risk investments, including a recent crackdown on misleading adverts that promote investing in high-risk products.

Forbes said this is all clearly part of a “coherent framework”.

The news was also welcomed by the Investment Association, the trade body for UK investment managers.