At the end of June the FCA set out new rules to give both retail investors and more defined contribution pension schemes access to Long Term Asset Funds (LTAFs).
The LTAF, introduced by the FCA in 2021, is a type of open-ended authorised fund created to invest in long-term illiquid assets such as private equity, venture capital, infrastructure and real estate. LTAFs however are a higher risk investment product with potentially higher returns but have less immediate liquidity and longer redemption timelines.
These new rules move the categorisation of LTAFs from a Non-Mass Market Investment to a Restricted Mass Market Investment, which means they can now be marketed to ordinary retail investors with appropriate risk warnings, customer assessments and safeguards in place in line with other higher risk products. It also should mean better access for self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs).
Ordinary retail investors (individuals who haven't signed either a Sophisticated Investor certificate or High Net Worth Indvidualr certificate) will now benefit from these additional investor protections rules when applying to LTAFs who will accept such investors.. These rules relate to investor engagement (running of meetings with investors, notifications and reporting to investors), the register of unitholders and restrictions on what types of payments and charges can be taken from LTAF unit classes which are made available to ordinary retail investors.
Additionally there are changes relating to the amounts that fund of funds can invest into LTAFS: a Non-UCITS Retail Scheme Fund of Alternative Investment Funds (NURS FAIF) may invest up to 35% of its scheme property in a single LTAF, but no more than 50% in LTAFs. Changes are also being made to the draft pensions distribution rules in preparation for more pension funds.
The FCA is also seeking views on whether the protections of the Financial Services Compensation Scheme should be available for this product, or whether a different approach should be in place, before LTAFs get to the retail market.
By introducing these new rules the FCA, Bank of England, the Treasury and industry, are working together aim to create an environment where investment in longer-term, less liquid assets, by investors who understand the risks, can flourish.