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The FCA has also been following the IOSCO developments closely and the previous IOSCO report, which was, with spectacular good timing, published the day before the EU referendum vote in the UK, was taken into account by the FCA in developing its consulation document.
"Patient capital" proposals
In December, the FCA issued two further documents that are directly relevant to investment in in illiquid assets. These were Consultation Paper CP18/40, "Consultation on proposed amendment of COBS 21.3 permitted links rules”, which you can find here and Discussion Paper DP18/10, "Patient Capital and Authorised Funds" which you can find here. They were closely related and were both open for comments until 28th February 2018. In 2016, the government launched a review looking at “patient capital” investment. In this context, ‘patient capital’ refers to a broad range of alternative investment assets intended to deliver long-term returns; for example, real estate, infrastructure private equity, corporate debt and venture capital.
The consultation goes on to say that “these assets are typically illiquid and often require a committed investor willing and able to tie up their capital and forgo on-demand liquidity or an immediate return on investment”.
The two documents consider two aspects of opening up patient capital investment:
a) Amending the “permitted links” rules to allow investment by insurance linked products. This is important as many defined contribution pension schemes are invested through insurance linked products. John also identified in his report for AREF in 2017 that the challenges of daily pricing are common to retail investors investing through model portfolios, defined contribution pension schemes and unit linked insurance products.
b) The second paper is a discussion paper on allowing authorised funds that can be marketed to retail investors and authorised funds that can be marketed to professional investors to invest in patient capital assets. It does not provide any answers, but at least asking the questions gives the industry the opportunity to respond.
The broader discussion opportunity in the second document is of wider interest than the relatively narrow technical point in the first.
The points raised in respect of open-ended property funds in terms of the deferral option and changing borrowing restrictions are also relevant. John attended the FCA open meeting on the proposals on 17th January and made this point.
The discussion document also raises the possibility of the establishment of a new type of fund for investment in long term assets. We will follow this closely as we believe that there is a need for more flexible onshore fund vehicles that are not encumbered with the restrictive rules of the existing UK authorised fund regulations.
John contributed to the IPF and AREF responses and we also submitted our own response to the discussion document that you can find here. It repeats the points that we made in respect of the earlier consulation on open-ended property funds.
In February 2019, the Department for Work and Pensions (DWP) issued a paper, Investment Innovation and Future Consolidation: A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational Defined Contribution schemes. You can find it here.