The Financial Conduct Authority (FCA) has published a Policy Statement (PS) setting out their responses to the feedback they received to the consultation on proposed amendments of COBS 21.3 permitted links rules in the Conduct of Business (COBS) sourcebook.

The FCA are amending the rules to address unjustified barriers to retail investors investing in a broader range of long-term assets in unit-linked funds, while maintaining an appropriate degree of investor protection.

The amendments follow recommendations made by the Law Commission and engagement with the Treasury’s Pension Scheme Investments Taskforce regarding potential regulatory barriers to investment in some less liquid or illiquid assets. This includes, for example, investment in infrastructure, loans secured on infrastructure assets and some less liquid securities.

The Policy Statement will impact those who have an interest in investing in illiquid or higher risk assets via unit-linked funds. It will therefore be of interest to:

  • pension scheme operators and trustees
  • operators and investment managers of unit-linked funds
  • life assurance companies with exposure to illiquid assets such as property, either by direct investment or through holdings in investment funds
  • intermediaries, such as platform service providers, wealth managers or financial advisers, whose retail clients invest in funds holding illiquid assets
  • firms communicating to retail clients financial promotions relating to unit-linked funds making significant investments in illiquid assets (these firms will be subject to the requirement in COBS to include a risk warning)
  • investors who have direct or indirect investments in these funds
  • managers of other types of fund such as undertakings for collective investment in transferable securities (UCITS), qualified investor schemes (QIS) or unauthorised schemes which may be affected by our proposals
  • insurance and investment trade bodies

The final set of measures removes some of the restrictions on the type of illiquid assets in which investment may be made, but sets an overall limit of 35% on the proportion of the fund that may be invested in these assets. The FCA also clarify that they will keep the limits in existing rules relating to investment in land and property. These investments will not be included in the overall 35% limit. Use of these extended permissions is conditional on the insurer satisfying new requirements:

  • ensuring, on a continuing basis, that the investments are suitable and appropriate for a policyholder’s circumstances, and that the timing of benefits due to a policyholder under the contract are not negatively affected by liquidity issues
  • setting out clearly and prominently to a policyholder the additional risks and consequences involved.

Firms wishing to make use of the new conditional permitted links will need to ensure compliance with these rules with effect from 4 March 2020.