UK Regulators Support Investment in Productive Finance to Boost Economy

The Financial Conduct Authority (FCA) in the United Kingdom has recently announced plans to collaborate with the Prudential Regulation Authority (PRA) and The Pensions Regulator (TPR) in an effort to remove barriers to productive finance investment.

According to recent data, private defined benefit (DB) pension funds held £1.4 trillion in assets by the end of last year, not including those in the winding-up process and local government pension schemes. The data for the defined contribution (DC) market in 2023 is not yet available, but figures from 2022 show total assets of £1.4 trillion.

In early March, Chancellor of the Exchequer Jeremy Hunt highlighted the fact that only 5% of UK pension assets are currently invested in the UK economy, a significantly lower amount compared to other countries. Hunt aims to encourage UK pension schemes to allocate at least 5% of their default funds into UK private equity in order to stimulate economic growth.

The Chief Executive Officer of the FCA, Nikhil Rathi, stated that the FCA, PRA, and TPR will collaborate to mitigate potential risks and create a more conducive environment for UK investment. While recognising that regulators should not dictate investment decisions, Rathi emphasised the need to remove inappropriate barriers to productive finance investments.

Addressing the challenges faced by the UK financial industry, Rathi emphasized the importance of addressing issues related to cost, scale, cultural barriers, and risk appetite, as well as improving collaboration among market participants.

Last year, the FCA introduced rules to expand retail and pensions access to Long Term Asset Fund (LTAF) and granted authorization to five sub-funds, with a robust pipeline for more authorizations in the near future. The target assets under management after three years for the authorized LTAFs is projected to reach nearly £6 billion.

Additionally, the FCA is working on a proposed value for money framework, which aims to shift the focus away from short-term fees and prioritise long-term value for consumers. The framework will necessitate transparency from operators regarding investment returns, costs, and other metrics, allowing for scrutiny on whether genuine value is achieved over the long term.

The goal of the value for money framework is to protect consumers from being negatively impacted by underperforming schemes, while encouraging the consideration of a wider range of asset classes to promote diversification and improve long-term risk-adjusted returns.

In conclusion, the FCA’s initiatives to remove barriers to productive finance investment and enhance transparency in the value for money framework demonstrate a commitment to fostering a more prosperous and secure environment for UK investment. Through these efforts, the UK financial industry is poised to facilitate economic growth and provide long-term value for pension savers and investors.