UNITED KINGDOM: FCA Patient Capital and Authorised Funds Feedback Statement

Sunday March 1 2020

On 12 December 2018, the FCA published a Discussion Paper on Patient Capital and Authorised Funds (DP18/10). DP18/10 sought views on whether there are any unnecessary barriers to investing in long-term assets (also known as patient capital) through authorised funds. Long-term assets can refer to a broad range of alternative investment assets intended to deliver long-term returns, including venture capital, private equity, private debt, real-estate and infrastructure. These assets are typically illiquid and often require committed investors with long-term investment horizons.

DP18/10 provided an overview of the UK’s authorised fund regime, set out existing opportunities to invest in long-term assets and invited feedback to help the FCA identify unnecessary barriers.

The Feedback Statement (FS), published on 28^th February 2020, summarises the responses the FCA received, including the Investment Association’s (IA) proposal for a new type of authorised fund designed to invest in long-term assets – the Long-Term Asset Fund (LTAF).

 The FS will be of interest to:

• operators and investment managers of UK authorised funds and specialised funds (ELTIF, EuSEF and EuVECA), and their depositaries
• intermediaries, such as platform service providers, discretionary wealth managers and financial advisers
• pension plan operators (eg those offering self-invested personal pensions)
• life assurance companies with an interest in patient capital, either by direct investment or through holdings in investment funds
• retail, professional and institutional investors
• ancillary service providers

The FCA received 21 responses from a range of stakeholders, including investment management firms and their representative bodies, law firms and individual investors.

• Chapter 2 summarises the feedback on retail investor access to long-term assets through UCITS schemes and NURSs – the 2 main categories of funds authorised by the FCA in the UK for wider retail distribution. Broadly, respondents agreed these schemes only provide limited options because of restrictions intended to offer a degree of protection.
• Chapter 3 summarises the feedback on professional and sophisticated retail investor access to long-term assets through the third main category of authorised fund – a Qualified Investor Scheme (QIS). Respondents found that QISs are suitable for investment in long-term assets.
• Chapter 4 summarises feedback on diversification rules and their impact on investments in long-term assets through authorised funds. It also covers feedback on the potential for mandatory suspensions in authorised funds investing in longterm assets. Respondents found that diversification rules in authorised funds can be problematic for fund managers investing in long-term assets and requested a more flexible approach to such rules.
• Chapter 5 summarises feedback on specialist fund regimes, such as the European Long-Term Investment Fund, and their role in facilitating investment in long-term assets. Respondents said that limited use of these funds was related to complex operational requirements and demanding suitability requirements.
• Chapter 6 summarises feedback on other regulatory barriers identified by respondents, such as dealing frequencies and the pension charge cap. Respondents pointed to barriers such as a reluctance from distributors to accommodate funds that do not offer daily dealing and tax rules.
• Chapter 7 provides an overview of the IA’s LTAF proposal and the FCA’s initial response.

The FCA found no inappropriate barriers to investing in long-term assets within the UK’s authorised funds regime. Broadly, respondents found the current authorised funds regime fit for purpose for long-term investments by professional and sophisticated retail investors.

For broad retail distribution funds, barriers do exist which limit the range of available investment options. However, in the FCA’s view it is not clear that these barriers are inappropriate or how they might be relaxed without introducing a degree of risk that is not appropriate for retail investors. The FCA also noted that other investment products, such as investment trusts, already provide alternative ways for retail investors to access long-term investments.

Finally, the FCA will consider any rule changes that may be recommended upon completion of the FPC work later this year.

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