FCA consults on permitted links barriers to patient capital

The Financial Conduct Authority (FCA) has launched a consultation on permitted links, aimed at addressing “unjustified barriers” for defined contribution pension schemes looking to invest in patient capital.

Launched today, 12 December, the FCA said it was looking to remove potential barriers for retail investors investing into a “broader range” of long-term assets in unit linked funds, following on from the Law Commissions’ 2017 proposal that pensions funds should have more access to illiquid assets.

The consultation is the next step following the Budget announcement that the government is looking to open up DC investment into “innovative high-growth firms”, as well as well as the wider illiquid market.

The regulator said it was seeking to “enable a broader range of long-term investment through unit-linked funds, particularly in defined contribution pension funds where members invest via unit-linked funds”. DC assets under management are expected to total £1trn by 2025.

FCA executive director of strategy and competition, Christopher Woolard, said: “We are proposing changes to allow retail investors greater access to long-term investment opportunities.

“We are also seeking views to help us identify any unnecessary barriers to investment in patient capital through authorised funds. We will ensure that any changes continue to provide an appropriate level of protection for consumers.”

Permitted links, which have been widely misunderstood in the past, restrict the type of investments that insurers can offer to DC schemes to ensure they remain “reasonably liquid”, but do allow for some illiquid investments such as direct property and land.

The FCA said it would be looking to “reduce the potential harm from a lack of consumer understanding by making investment and liquidity risks” more transparent.

The regulator has also launched a discussion paper alongside the consultation, exploring how UK authorised funds can invest in patient capital. The consultation closes on 28 February 2019.

A government consultation on the barrier created by the charge cap is expected in the first half of 2019.

Last week, the Pensions and Lifetime Savings Association launched a new guide on patient capital and other illiquid investments for trustees, pulling together case studies from PLSA members – both pension schemes and asset managers – who have already been investing in a long-term and patient capital.

The Pensions Regulator has also updated its guidance for DC schemes considering patient capital investment.

In October, Chancellor Philip Hammond used the Budget to pave the way to use billions of pounds of defined contribution pension money to fund fast-growing British technology companies.

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