Selling LTAFs to retail investors could prove to be a mistake

The AIC has responded to today’s publication of the Financial Conduct Authority’s Policy Statement PS23/7.

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The Association of Investment Companies (AIC) has responded to today’s publication of the Financial Conduct Authority’s Policy Statement PS23/7, ‘Broadening retail and pensions access to the long-term asset fund’.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The decision to extend distribution of Long-Term Asset Funds (LTAFs) could prove to be a mistake. Woodford Equity Income Fund and problems in the open-ended property sector have shown how much harm liquidity problems can cause to retail investors. Selling LTAFs to retail investors remains an accident waiting to happen. As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging.

 “This will be an early test of the Consumer Duty. LTAF providers must be confident that arrangements will prevent liquidity mismatches and that retail investors will not be disadvantaged in comparison with institutions, who are known to react more swiftly to liquidity crunches than retail buyers. Distributors will also have to be confident that they are allowing access to these products on an appropriate basis. The requirement for an appropriateness test and more specifically for investors to self-certify that they are investing no more than 10% of their assets into these products is not enough. Indeed, the FCA’s own evidence shows that some investors self-certify when they do not meet the criteria.

“Of course, investors should have access to productive assets and illiquid assets. But creating a new structure with inherent liquidity mismatches is not the answer. Investment companies have been around for over 150 years and are a proven investment vehicle already providing access to these asset classes. They are a UK success story, a major part of the London market and popular with retail investors. More should be done to encourage the creation and expansion of investment companies.

“The LTAF rules were issued in November 2021. Products have only recently started to be approved. This would suggest there has not been a stampede for these investments from institutional investors and yet now, unproven in the market, they are going to be made available to less sophisticated retail investors. We hope firms exercise sufficient caution to stop a future scandal arising, but if it does, there can be no claim that the industry and regulator were not warned.”


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