15 January 2019

Patient capital is the name given to investments in illiquid assets such as infrastructure, corporate loans and venture capital that aim to deliver long-term returns. They, in theory, should be a popular form of investment for pension schemes. However, current FCA rules on permitted links have had the consequence of preventing investors from accessing such returns via permitted links.

The FCA proposes amendments to its existing ‘permitted links’ Rules in COBS 21.3. The proposed changes are briefly summarised as:

  • Permitting investment in ‘immovable’ structures or installations on buildings by creating a new conditional permitted link. It is hoped that this will encourage investment in long-term assets, for example wind farms that are legally not regarded as buildings. It is conditional on certain consumer protection measures being met.
  • Removing the 10 per cent limit on the proportion of the fund assets that can be held in land and property. This will be replaced by the overall amalgamated illiquid asset limit, detailed below, if consumer protection measures are met, but otherwise the 10 per cent limit will remain.
  • Permitting investments in unlisted securities that are not readily realisable in the short term as long as liquidity requirements at the level of the investment fund can be met. This is to allow further investment in long-term assets whilst still factoring in investor protection and the inevitable need to liquidise some assets for investors.
  • Removing the current 20 per cent limit on holding assets through a QIS/UCIS and instead relying on the amalgamated overall threshold limit subject to the investor protection conditions being met.
  • Adding a new conditional permitted loan, this will allow loans to be secured on immovables in the new conditional immovable category. The proposition would be subject to the firm complying with its consumer mitigation obligations.

A new 50 per cent limit has been proposed on the total gross illiquid assets that can be held as permitted links or conditional permitted links within a fund for firms that meet the new investor protection conditions. It removes existing limits for each permitted links category which enables flexibility in the choice of illiquid assets investments. For firms who are unable to meet conditions that provide a level of investor protection this threshold will not apply and the existing limits in place will remain to ensure that investors are protected.

In order for firms to access the above proposed changes, the new rules will also require firms to adhere to new consumer risk mitigation obligations. Firms will need to provide consumers with adequate risk warnings regarding liquidity and investment risk in relation to investment in patient capital. They also need to ensure that investment products are appropriate for retail investors.

Firms who wish to respond to the FCA’s consultation should submit responses by 28 February 2019. Firms who may be affected by these rules will also need to consider how they create related investment products and whether they need to change their approach in order to benefit from the new rules.

Insurers providing investments for registered pension schemes may want to take into account the requirements in the Finance Act 2004, the Pensions Act 1995 and the Investment Regulations [1] that apply at the scheme level. Even with these restrictions, the changes will represent a significant expansion of the investment options available.

For advice about this or any other financial regulatory matter please speak to Tom Dunn or your usual Burges Salmon contact.


[1] The Occupational Pension Schemes (Investment) Regulations 2005 [SI 2005/3378]

Key contact

Tom Dunn

Tom Dunn Partner

  • Head of Regulated Funds and Financial Services
  • Regulated Funds
  • Financial Services

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