FS23/7: Long-Term Asset Funds (LTAFs) – Financial Services Compensation Scheme Coverage Feedback Statement

In view of the issuance of policy statement 23/7 (EventID 21802) in which the Financial Conduct Authority (FCA) – among others – sought feedback as to whether or not LTAFs should be kept under the remit of the Financial Services Compensation Scheme (FSCS), the Authority has now published a corresponding feedback statement (FS23/7). In this feedback statement, the FCA outlines the responses it has received and presents its way forward on this matter.
To recall, currently, activities such as the advise on LTAF investments, the distribution of LTAF units, or the functioning as a depository of an LTAF are included in the FSCS due to the fact that the application of the compensation scheme is activity-based rather than product based and covers all regulated activities relating to LTAFs. Due to the increased risks involved in LTAF investments, the FCA questioned whether or not coverage under the FSCS is indeed reasonable or desirable for (all) LTAF related activities.
#### Comments by respondents
According to the FCA, many respondents pointed out that focusing solely on excluding LTAFs from FSCS coverage could potentially hinder the development of LTAFs for retail customers, jeopardizing their success and affecting consumer confidence. Moreover, responds criticized the idea of categorizing LTAFs as „risky“ products for purposes of excluding them from the FSCS because they argued that – despite specific liquidity and valuation considerations – LTAFs are likely to offer greater diversification and lower volatility compared to other FSCS-covered products. Finally, respondents generally supported the idea of evaluating the scope of FSCS protection comprehensively rather than on a product-by-product basis. They argued that considering FSCS protection „in the round“ is a more rational approach to avoid confusion and inconsistencies in the protection of various financial products.
#### Way forward in this matter
Essentially, the FCA notes that after careful consideration and feedback analysis, it has decided not to exclude regulated activities relating to long term asset funds from the compensation scheme. Instead, the Authority plans to review and potentially make changes to the overall scope of FSCS protection for retail investments, „rather than excluding activities relating to certain investment products in isolation“. This approach aligns with the FCA’s previous communication in feedback statement (FS22/5) about key principles underpinning the FSCS in which the regulator noted that it will continue to explore future changes to FSCS protection as needed.