Financial Conduct Authority  

FCA says it cannot prevent investment losses in Ltafs

FCA says it cannot prevent investment losses in Ltafs
Nikhil Rathi, chief executive of the Financial Conduct Authority (Chris Ratcliffe/Bloomberg)

The Financial Conduct Authority cannot ensure that retail investors do not encounter investment losses in a long term asset fund, its chief executive has said.

In a letter to Dame Angela Eagle, the former interim chair of the Treasury Committee, on November 11, Nikhil Rathi said Ltafs will be risk taking vehicles, and some illiquid assets will be comparatively risky. 

Rathi outlined the protections that will be put in place, should the Ltaf be made available to retail investors.

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These include risk warnings in any promotions for the product, as well as a ‘personalised’ risk warning, including the investors’ name.

Investors will be told of the scope of protection available through the Financial Services Compensation Scheme and Financial Ombudsman Service.

The firm must also take ‘reasonable steps’ to establish that the investor is either a high net-worth individual, a sophisticated investor or a restricted investor, and must ensure the vehicle is appropriate for the investor and they have sufficient knowledge and experience to understand the risks involved.

“To be clear, [these] provisions…and our overall supervisory approach cannot and are not intended to ensure that no investment losses would arise in an Ltaf,” Rathi said.

“Ltafs will be risk-taking vehicles…but our provisions are intended to ensure investors take these risks knowingly, and when they are able to do so.”

Rathi said most mass-market retail investors are likely to fall within the restricted investor category, which means a maximum of 10 per cent of their investible assets can be invested in restricted mass-market investments, including Ltafs.

The Ltaf was launched in October last year to allow sophisticated investors and defined contribution pensions schemes access to illiquid or long-term assets, such as infrastructure, private equity and real estate. 

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. 

In August, the FCA set out proposals to expand Ltaf access to certain retail investors, and firms had until October to submit their feedback. 

No Ltafs have launched yet, and in the letter Rathi said the FCA will develop its supervision plan as it gets a “better view” of the types of Ltaf that will be set up.