On 4 March the FCA published PS 20/4 which sets out their final rules following on from consultation, CP18/40, on amendments of COBS 21.3 permitted link rules. Permitted links are the investment rules for unit-linked life policies (“life funds”) where the investment risk is borne by a policyholder who is a natural person. Life funds are used extensively in the UK pensions market, particularly by Defined Contribution (DC) schemes, and the rule changes are designed to facilitate greater access to illiquid assets by these investors, while maintaining an appropriate degree of investor protection.
The final set of measures removes some of the restrictions on the type of illiquid assets in which investment may be made, but sets an overall limit of 35% on the proportion of the fund that may be invested in these assets. However, the existing rules relating to investment in land and property have not been changed and these investments will not be included in the overall 35% limit.
Use of the extended permissions is conditional on the insurer satisfying new requirements in the rules, namely:
- ensuring, on a continuing basis, that the investments are suitable and appropriate for a policyholder’s circumstances, and that the timing of benefits due to a policyholder under the contract are not negatively affected by liquidity issues
- setting out clearly and prominently to a policyholder the additional risks and consequences involved.
For more information on this see the AREF page on Illiquid Assets & Patient Capital.
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