The Financial Services Authority is proposing changes to its ‘permitted links' rules which will allow insurance companies to offer a wider range of investments, including access to property funds as an investment.
Key changes are being made to shift unit-linked investment links subject to “high level principles” because there are now inconsistencies between the type of investments UK funds held under the FSA’s COLL rules can make compared with unit-linked insurance firm investments – a market said to be worth a total of £650bn and £110bn in premiums.
Under existing rules, institutional pensions funds - which, the FSA notes, account for 40% of total assets under management in pooled insurance funds – are restricted in the type of property investment fund mandates they may issue, for example, because current rules require funds be “readily realisable” at all times, and are restricted to direct property investments only with certain specified territories.
The FSA is altering rules - according to CP07/7: permitted links, long term insurance - as it recognises “assets cannot always be expected to be able to be sold within seven working days at a price within 9.75% of its stated value” and requiring insurers to do could be detrimental to the value of policyholder investments, so principle 1 of unit-linked investment requirements will state:
- policies must be “capable of being accurately and fairly valued on an ongoing basis, realised in a timescale that enables the firm to fulfil its obligations whenever required under the policies and for an amount that can be reconciled with the previous valuations”.
Similarly, some funds can find themselves in breach of FSA rules under the current arrangements when a stock’s listing is suddenly suspended indefinitely – as was the case when Railtrack shares were suspended, for example.
So under the changes, the FSA is deregulating certain aspects of rules which will:
- Allow investment in property through investment vehicles rather than only directly;
- Allow investment in property where it is in “properly functioning markets” – considered to have no artificial protection or repatriation of money barriers
- Replace the current “readily realisable” rule on certain asset classes, such as unlisted securities
- Allow unlimited use of authorised/recognised collective investment schemes by defined benefit scheme policyholders when acting as a collective group, and
- Introduce tolerances to reduce the need for waivers of rules where there are minor breaches.
Rules are still designed to protect retail investors but will open the way for unit-linked investments to be made in:
- Approved, listed and unlisted securities, removing the current restriction on unlisted securities to just 10% of the “aggregate property-linked benefits under the contract”;
- Land, if it can be demonstrated there is a “properly functioning market for transactions of land”;
- Loans, provided it is fully secured by a mortgage of charge on land, or through an approved financial institution;
- Collective investment schemes, provided they are authorised to be promoted in the UK;
- Derivatives, only where the link is a Qualifying Investor Scheme and this allowance only open to institutional investors, or as contracts only employed to reduce investment risk;
- Cash and deposits, albeit deposits cannot be defined as a product where interest is paid by a “basket of permitted and non-permitted indices”, and
- Stock lending, where it is absolutely clear to the policyholder they bear the whole risk of lending and are entitled to full recompense for the use of their assets.
This means investments such as commodities, wine, works of art are still considered unacceptable investment links unless they are provided as links through authorised or recognised CIS.
Likewise, the FSA is seeking guidance on whether restrictions on the definition of a deposit will affect the ability to deliver FTSE-linked capital guarantee bonds.
All of the announcements made today on permitted unit-linked investments were first flagged by the FSA in its 2006/07 business plan, says Dan Waters, FSA director for retail policy and asset management.
“The current Permitted Links rules are out of date, inflexible and difficult for firms and for the FSA to interpret. Our proposals aim to take away unnecessary detail, and replace it with more principle-based high level rules. This is a practical expression of the FSA's stated aim of moving towards more principles-based regulation and should give the firms affected greater flexibility in investing whilst maintaining the appropriate level of consumer protection.”
A policy statement on the next stage of development is expected to be announced in the summer, says the FSA.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7034 2679 or email [email protected].IFAonline
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