On 6th September 2024, the FCA published its Quarterly Consultation Paper No. 45 (CP24/18) on proposed miscellaneous amendments to the FCA Handbook. These are relatively minor changes, however, the Regulator is still looking for firms’ feedback before implementing these proposals.
In Chapter 3, the FCA is proposing to amend the rule against circular investment (COLL 5.6.10R(3)) so that it does not apply when the second scheme of a non-UCITS retail scheme (NURS) is a long-term asset fund (LTAF). This is an attempt to remove the barrier that currently prevents NURSs from investing in LTAFs and facilitate greater access to and investment in long-term illiquid assets.
Since the LTAF regime was introduced in 2021, the number of LTAFs launched has been very limited. This prompted the FCA to consider changing the rules to promote a wider investment in LTAFs by making a number of clarifications and amendments to the rules that are posing hurdles to NURSs from adding LTAFs to their portfolios.
1. Simplifying second scheme rules in respect of LTAFs
Under the current rules, COLL 5.6.10R(3) prevents NURSs from investing in a second scheme (including an LTAF) if that second scheme invests more than 15% of its scheme property in collective investment schemes (CISs). The exposure of the second scheme to other CISs is limited to 15% to prevent circularity of investment.
LTAFs frequently use investments in CISs to enable efficient investment in underlying assets such as venture capital, private equity, private debt, real estate and infrastructure and, as a result, defined contribution pension schemes and some retail investors may not be able to efficiently invest in LTAFs. The risk of circularity of investment in these cases was addressed through the introduction of a principle-based rule (COLL 15.6.9R (1)(b)(iii)) rather than through a quantitative restriction.
As the need to protect against circularity of investment is in fact limited, the FCA is suggesting that the threshold restriction set by COLL 5.6.10R(3), should not apply where the second scheme is an LTAF, since, as the rule currently stands, it becomes harder for UK investors to access regulated LTAFs.
2. Key guardrails and protections
Clarification of exposure limit application
It should be noted that whilst investment in LTAFs will now be allowed, the overall restriction on exposure to unregulated collective investment schemes, including LTAFs, will remain at 20%. The FCA is looking to amend COLL 5.6.10R, so that it is clear that the 20% exposure limit applies globally to any combination of holdings in LTAFs, qualified investor schemes, unregulated schemes and unapproved securities. This is in line with the Regulator’s original intention, to allow a NURS to make limited investment in unregulated collective investment schemes.
New requirements to hedge against liquidity risk
NURS investors are exposed to liquidity risk where the NURS invests in LTAFs due to the infrequence of dealing opportunities in LTAFs, often leaving NURS managers unable to dispose of such holdings. To tackle this issue, the FCA is proposing to add provisions to COLL 5.6 setting requirements for NURS managers, when they invest in LTAFs, to ensure that they can meet their redemption obligations to investors through assessment of the LTAF’s liquidity, redemption and dealing arrangements and the diversification of holdings in the NURS.
What should firms do next
Firms are prompted to provide their feedback to the FCA’s proposals before the Consultation closes on 11 October 2024.
Complyport can help your firm understand the FCA’s proposals, as well as the impact of these amendments to your firm, if these were to be implemented upon finalisation. We can support your firm by providing:
- Regulatory Guidance: helping your firm understand the FCA’s expectations and providing expert advice on the relevant regulatory requirements;
- Ongoing Support: providing ongoing support to ensure that your firm remains compliant as regulations evolve;
- Training: providing training on the practical requirements and best practices for compliance.
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