European Union proposals to categorise local authorities as retail investors present a danger to local government pension fund pooling, according to experts.
Last week, Room151 reported widespread concern about the impact on treasury management of changes outlined in the EU’s Markets in Financial Instruments Directive II (MiFID II).
Now concerns have emerged about the ability of pooling vehicles to conduct business on behalf of any member funds which fail to opt up to professional status under the new arrangements.
The Financial Conduct Authority (FCA) recently consulted on implementation of the directive in the UK.
In its response, the Local Pensions Partnership, a pool formed between Lancashire County Pension Fund (LCPF) and London Pensions Fund Authority (LPFA), complained about the effect on its investment management operator, Local Pensions Partnership Investments Ltd (LPPI).
It said that the vehicle would be blocked from investing on behalf of its member funds if they are unable to upgrade from their default retail investor status.
It said: “Within its current regulatory permissions, LPPI (and many other asset managers) can only transact with professional clients and eligible counterparties.
“Opting up existing and potential new clients from the LGPS client base to elective professional status would be essential for the continued operation of our (and other) LGPS pools, whilst obtaining regulatory permission to deal with retail clients is neither practical nor desirable, with likely significant resource, operational, financial and governance implications.”
LPP said that the reclassification of LGPS clients is “not necessary, given the collective expertise, and the requirement enshrined within LGPS investment regulations for appropriate advice to be obtained in advance of investment decisions being made”.
LPPI was authorised by the FCA in October 2016, and offers investment services, including a role as an alternative investment fund manager to the LPP’s authorised contractual scheme.
It also provides investment and advisory services to other segregated or collective investment mandates.
Jeff Houston, head of pensions at the Local Government Association, told Room151 that it could be tricky for LGPS pools to upgrade to professional status.
He said: “The procedures that are set out by the FCA are not directly appropriate to how local authorities make decisions because they assess individuals; and local authorities tend to make investment decisions collectively.
“Which individual are they going to assess? The chief investment officer or the section 151 officer? What happens if that individual leaves?”
Houston added that the proposals could affect the ability of local authorities to lend money to each other.
He added that officials in the Department for Communities and Local Government and the Treasury are aware that there is an issue for LGPS pooling under the FCA proposals.
