Financial Conduct Authority
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Wider access for retail customers to alternative investments
The Financial Services Authority (FSA) recently set out proposals that would allow UK retail consumers to invest in funds of hedge funds and other alternative investments sold by firms authorised in the UK.
Retail investors here are already able to get exposure to hedge funds and other alternative products in a variety of ways, including structured products. The FSA now believes the time is right to allow the development of retail-oriented Funds of Alternative Investment Funds (FAIFs) within its regulatory regime. This would bring substantial structural and operational safeguards including the requirement to have an independent depositary, strict rules on independent valuation of underlying assets and timely redemption of investments.
Dan Waters, FSA Director Retail Policy and Asset Management Sector Leader, said:
"Asset management is a dynamic and innovative industry and we believe it is important that consumers can get access to the latest techniques to manage their own savings and investments. We think the time is right to permit access to a wider range of innovative strategies through authorised onshore vehicles. This will allow investors more choice and a better opportunity for risk diversification, whilst maintaining investor protection through our rules on the operation of the product.”
A key element in the FSA's approach is its expectation that the fund manager will operate with ‘due diligence’. This sets out FSA requirements in a more principles based way, and the FSA proposes guidance for the fund manager in the matters the FSA believes he needs to consider in making, and maintaining, significant investments into unregulated schemes. The FSA has also accompanied the Consultation Paper with a case study illustrating the respective responsibilities of providers and distributors of these products, and would welcome comment upon that as well.
The FSA proposals would:
- Introduce retail-oriented FAIFs into the existing FSA regulatory regime for Non-UCITS Retail Scheme (NURS);
- Lift the existing 20% investment restriction into unregulated collective investment schemes for NURSs, thereby allowing the development of FAIFs.
- Apply due diligence guidance for fund managers producing FAIFs, to guide them on the matters to consider in making their initial and on-going investment decisions.
- For existing NURSs, leave the current rules unchanged, although a few consequential changes would be necessary to ensure overall consistency in the regime.
- Ensure the regime for Qualified Investor Schemes (QISs) is in line with the FSA’s revised approach for NURSs.
The consultation will close on 27 June 2007. The FSA will then finalise the draft rules in light of the responses and publish a Policy Statement giving feedback towards the end of the year. This will set out the rule changes and the date on which they will come into effect.
Notes for editors
- CP 07/6, Funds of Alternative Investment Funds (FAIFs) is available on the FSA website.
- Although we use the term FAIF in the CP, the term does not indicate the FSA is introducing a new type of retail product. Instead they will be Non-UCITS Retail Schemes (NURSs) , a category of scheme that already exists in our rules. NURSs are allowed to be widely marketed to retail consumers in the UK. The term FAIF denotes a NURS that invest more than 20% of its scheme property into unregulated collective investment schemes.
- UCITS schemes are regulated under an EU Directive. UCITS schemes (unlike NURSs) are given an EU "passport", enabling them to be sold across border throughout the EEA without re-authorisation in any host state.
- Qualified Investor Schemes (QISs) are schemes that are authorised by the FSA, but which can only be sold to limited classes of sophisticated investor.
- The decision to consult followed the FSA's feedback to Discussion Paper 05/3 Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World, which considered the increasing variety of retail investment products, the risks these products posed to consumers, and how those risks could be addressed.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.