On 12 December 2018, the FCA published Consultation Paper 18/40: consultation on proposed amendment of COBS 21.3 permitted links rules  (CP18/40).

The FCA’s proposals in CP18/40 will be of interest to those with an interest in unit-linked funds that may wish to hold illiquid or higher risk assets. The proposals follow recommendations by the Law Commission in its June 2017 report on pension funds and social investment regarding potential regulatory barriers to investment in illiquid ‘patient capital’ assets.

Generally, the FCA is consulting on potential changes to its permitted links rules in the Conduct of Business (COBS) sourcebook. The intention is to address any unjustified barriers these may present to investment by retail investors in a broader range of long-term assets in unit-linked funds, while continuing to offer an appropriate degree of investor protection.

Specifically, the FCA proposes amendments and additions to the permitted links rules in COBS 21.3 and relevant related rules in four broad areas (set out in detail in chapter 3 of CP18/40). The key changes suggested by the FCA are:

• clarification around existing permitted links requirements to make clear the FCA’s expectations in areas where the interpretation of the COBS rules is perceived as a barrier to patient capital investment;
• revised wording to broaden investment range. For insurers that are able to meet conditions which provide an enhanced degree of investor protection, the FCA proposes to add additional conditional permitted links categories which supplement the existing range of permitted links;
• a proposed new limit requiring that overall investments in illiquid assets in a linked fund should comprise no more than 50% of total assets for firms meeting the new conditions. The proposed changes will remove, and therefore allow these firms to exceed, the current limits for individual permitted links categories as long as they do not exceed the overall threshold limit; and
• the introduction of appropriate risk warnings to help consumers understand the investment and liquidity risks involved. This is in addition to a proposed requirement on firms using the greater flexibilities afforded by the FCA’s proposed changes to ensure that investments in more illiquid or risky assets are only offered/taken up where it is suitable and appropriate.

The deadline for responses to CP18/40 is 28 February 2019.