New FCA rules widen access to LTAFs for Non UCITS Retail Schemes

The FCA’s Handbook Notice 125, published in December 2024, announced that the changes to the investment restrictions for Non-UCITS Retail Schemes (NURS) announced in Quarterly CP24/18 and formalised in Handbook Instrument 2024/48, have been made.

The changes took effect on 20 December 2024 and widen investor access to long-term asset funds (LTAFs) by enabling NURS to invest more easily in them.

What was the issue?

Until now, a NURS has been able to invest up to 20% of its portfolio into units of one or more LTAFs, provided that (by COLL 5.6.10(3)R) the LTAF doesn’t invest more than 15% of its portfolio into any kind of collective investment scheme (a ‘second scheme’). The restriction is intended to prevent circular investment between funds.

Typically, LTAFs commonly invest via a single SPV, which would be caught by the CIS definition.

As a result, NURS were prohibited from investing in most LTAFs, in turn, meaning that DC pension schemes - and some retail investors - haven’t been able to invest efficiently in LTAFs.

However, in practice, the nature of the underlying assets in the CISs in which LTAFs invest makes the risk of circular investment minimal. Recognising this, the FCA addressed this through a standalone rule (COLL 15.6.9R(1)(b)(iii)) t as far as the LTAF is concerned.

The FCA didn’t, though, change the rules which restricts a NURS from investing into a second scheme which is an LTAF.

In CP24/18, the FCA consulted on proposals to amend COLL 5.6.10R so that it does not apply when the second scheme of a NURS is an LTAF, as well as on certain alternative protections.

What has the FCA done?

The FCA has now confirmed that, as proposed in its CP, it will:

• amend COLL 5.6.10R(3) so that it does not apply when the second scheme of a NURS is a LTAF
• amend COLL 5.6.10R so that the 20% exposure limit applies globally to any combination of holdings in LTAFs, qualified investor schemes, unregulated schemes and unapproved securities and
• continue to add provisions to COLL 5.6 in line with existing provisions in COLL 5.7.7R(3) and COLL 5.7.7AG(2) for NURS FAIF managers - COLL 5.7.7R applies only in relation to NURS FAIFs, as these are not subject to the 20% limit in LTAFs set out in COLL 5.6.10R.

In the view of the FCA, the proposed additions to COLL 5.6 “set out specific requirements relating to investments in LTAFs by NURS, so that NURS managers have sufficient control and oversight over the illiquid LTAF investments in their portfolio”.

For more information on LTAFs, see our online resource here.