CP18/40: Consultation on proposed amendment of COBS 21.3 permitted links rules

Open consultation: CP18/40
Consultation closes
Consultation feedback and final rules
Q4 2019
Q4 2019

In this paper, we are consulting on potential changes to our permitted links rules in our Conduct of Business (COBS) sourcebook. The purpose 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.

Read CP18/40 (PDF)

Our consultation follows recommendations by the Law Commission in their June 2017 report on Pension Funds and Social Investment (see below) and engagement with HM Treasury’s Pension Scheme Investment Taskforce (see below) regarding potential regulatory barriers to investment in illiquid ‘patient capital’ assets. Patient capital refers to a broadly defined range of illiquid investments (including, for example, venture capital, infrastructure and corporate loans) intended to deliver long-term returns. These different elements of patient capital may have significantly different/higher risk profiles and this may in turn affect their suitability for retail investors.

We are also publishing a discussion paper at the same time in order to explore the impact on our regulatory regime on investment in patient capital through authorised funds. 

We are seeking to remove some potential barriers to retail investors investing in a broader range of long-term assets in unit-linked funds. Our measures should:

  • Benefit consumers by allowing funds to choose investment opportunities that match the investment needs of consumers more effectively.
  • Enable a broader range of long-term investment through unit-linked funds,particularly in defined contribution pension funds where members invest via unit-linked funds.
  • Increase confidence and participation in the market by providing an appropriate degree of protection for investors seeking to invest in illiquid or higher risk patient capital assets within unit-linked funds.
  • Reduce potential harm from a lack of consumer understanding of the type of assets that they hold and reduce risks that consumers may invest in products that do not fully reflect their investment needs. This would be achieved by making investment and liquidity risks more transparent and requirements on authorised firms to take responsibility for ensuring that higher risk or more illiquid investments are only offered or taken up where it is suitable and appropriate for consumers and the purposes for which their investments are held.

Who this applies to

You should read this if you have an interest in unit-linked funds that may wish to hold illiquid or higher risk assets. Our consultation may therefore be of 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 funds making significant investments in illiquid assets (these firms will be subject to the requirement in our Conduct of Business Sourcebook (COBS) to include a risk warning)
  • investors who have direct or indirect exposure to these funds

Others may have a less direct interest in the issues raised in this consultation but may also find the CP relevant. For example:

  • 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
  • insurance and investment trade bodies
  • consumer groups

Next steps

This consultation is now closed. We will consider feedback to this consultation and publish a Policy Statement and, where relevant, make our final rules and guidance in 2019.