FCA scraps plans to exclude retail LTAF from FSCS cover

In its feedback statement published today (30 October), the regulator said that following input from several industry players, it will not seek to exclude LTAFs from FSCS cover, which provides compensation of up to £85,000 in the event that a regulated firm goes out of business.

Despite arguments in favour of the exclusion – such as the high investment risk of LTAFs; the existence of risk appetite assessments, financial advisers’ need to undergo suitability exercises and bringing down the high FSCS levies – the move will not take place.

The decision follows a consultation that began this summer, allowing the regulator to consider next steps before approval of any potential LTAFs that will promote to retail investors. 

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During the consultation, some respondents said removing FSCS cover from LTAFs could “undermine the work of developing LTAFs for retail, their potential success and could impact consumer confidence, which is at odds with the aims of broadening access to retail customers”.

They noted there were already several barriers to bringing the retail LTAF to market – including the need for platforms to invest in technological change; the application of the Consumer Duty to new products and distribution channels; and manufacturers’ need to invest in targeting the LTAF to a retail target market and seek approval from the FCA.

Moreover, removing LTAFs from FSCS cover “would only add another material barrier to the distribution of LTAFs that may make take-up unattractive”.

Players also stated that singling out LTAFs as a “risky” product would be “wrong” because, even though there are “specific liquidity and valuation considerations”, LTAFs will likely provide greater diversification and lower volatility than other products covered by the FSCS.

For instance, respondents argued that advising clients to invest in stocks – which can “irrevocably go to zero intra-day”, could be considered riskier than investing in an LTAF, which is required to diversify its holdings, is authorised by the FCA and is managed by a “heavily regulated manager”.  

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Additionally, industry players said that considering FSCS protection on a product-by-product basis “risks creating confusion and inconsistency”. Instead, they argued FSCS cover should be assessed as a whole.

In the feedback statement, the FCA said: “We have considered the position carefully and reflected on the feedback received. In light of this, we have decided not to take forward the option to exclude FSCS cover for regulated activities relating to LTAFs.

“We now propose to consider any changes to the scope of FSCS protection for retail investments in the round, rather than excluding activities relating to certain investment products in isolation.”

The FSCS has been contacted for comment.