On 4 March 2020, the FCA published Policy Statement 20/4: Amendment of COBS 21.3 permitted link rules – final rules and feedback to CP18/40 (PS20/4), which amends the permitted links framework that previously applied to insurers providing linked long-term contracts of insurance and impacts those who have an interest in investing in illiquid or higher risk assets via unit-linked funds. It is likely to be of particular interest to:

  • pension scheme operators and trustees;
  • operators and investment managers of unit-linked funds;
  • life assurance companies with exposure to illiquid assets such as property, either by direct investment or through holdings in investment funds;
  • intermediaries, such as platform service providers, wealth managers or financial advisers, whose retail clients invest in funds holding illiquid assets;
  • firms communicating to retail clients financial promotions relating to unit-linked funds making significant investments in illiquid assets (these firms will be subject to the requirement in COBS to include a risk warning);
  • investors who have direct or indirect investments in these funds;
  • managers of other types of fund such as undertakings for collective investment in transferable securities (UCITS), qualified investor schemes (QIS) or unauthorised schemes which may be affected by our proposals; and
  • insurance and investment trade bodies.

The permitted links rules are designed to ensure that, where a natural person is holding the investment risk, the assets underlying unit-linked life policies are appropriate for retail investors. There are five existing categories of permitted links most relevant to long-term capital investment in illiquid assets:

  • Category 1: permitted land and property;
  • Category 2: permitted unlisted securities;
  • Category 3: permitted scheme interests;
  • Category 4: permitted loans; and
  • Category 5: approved securities.

The FCA has added new ‘conditional permitted links’ which supplement the existing range of permitted links, and are available to insurers that are able to meet conditions providing an enhanced degree of investor protection (for example, adequate risk warnings). The changes aim to address perceived unjustified barriers to retail investors investing in a broader range of long-term assets in unit-linked funds, while maintaining an appropriate degree of investor protection. This follows recommendations by the Law Commission and engagement with the Treasury’s Pension Scheme Investments Taskforce regarding potential regulatory barriers to investment in some less liquid or illiquid assets.

Firms seeking to make use of the new conditional permitted links needed to ensure compliance with the rules with effect from 4 March 2020. However, insurers can continue to use the existing ‘permitted links’ rules.