UK FCA’s new consultation paper on investing in long term assets
The FCA issued proposals to enable UK- authorised open-ended funds to invest more efficiently in long-term, illiquid assets.
The FCA launched consultation on a new investment structure for long term assets, including structures are used for productive finance and as such, investors that are able to understand the risks should have the opportunity to invest in such structures. The consultation builds on the work of the UK’s Productive Finance Working Group and proposed Long Term Assets Fund (LTAF).
The consultation will be of interest to:
- asset managers with experience of managing illiquid, long-term assets
- potential investors in long-term asset funds
- investment advisers and private wealth managers
- insurers who write unit-linked insurance business
- fund distributors
Overview of proposals
New category of authorised open-ended fund
Long Term Asset Fund (LTAF)
Enable authorised funds to set up to invest in long-term, illiquid assets, including productive finance assets.
Liquidity Risk Management process
Open-ended funds need to match the underlying liquidity of the assets in which they invest with the redemption terms offered to investors. The issue of liquidity management has been considered for the proposed LTAF as follows:
LTAF proposed to have:
· notice periods and other liquidity management features that take account of the liquidity profile of the underlying assets (consistent with the Financial Policy Committee/ IOSCO/ FSB on liquidity risk mismatch in open-ended funds)
· operational infrastructure to be aligned to support funds with notice periods to accommodate funds that have other than daily dealing
LTAF and Illiquid Assets
Illiquid assets take many forms and therefore LTAF can be flexible to create a broad range of propositions, subject to minimum standards of consumer protection and to address specific risk related to investments in illiquid assets, such as valuation.
Proposed distribution of LTAF
Distribution is proposed to be restricted to professional and sophisticated investors only (although access to funds by retail/ high net worth investors is subject to wider FCA discussion)
Proposed rulebook amendments
· Creation of a new category of fund called long-term asset fund (LTAF)
· LTAF intending to be FCA authorised must meet defined criteria
· New chapter in the COLL rules to be created and Authorised fund managers will also have to comply with provisions in PRIN, FUND, CONS and SYSC.
· No other type of fund can use the term ‘LTAF’
· LTAF will be an alternative investment fund (AIF)
· Proposal to only allow full-scope UK AIFM to manage an LTAF
· Distribution of LTAF’s restricted and distributed in the same manner as Qualified Investor Schemes (QIS)
· Additional disclosures for investors in terms of how the fund will be managed
Additional Requirements proposed for LTAF’s
· Strong governance
o Valuation processes of the Authorised Fund Manager or rationale for a 3rd party valuer
o Annual report of an LTAF to include certain additional information on best interest,
o How the manager manages the liquidity and conflicts of interest in the best interest of the fund- responsibility for this to be allocated to an Approved Person
· Clear Disclosure
o Clear information on the LTAF and associated risks
o No specific additional disclosure intended where the LTAF makes claims of being sustainable, responsible or delivering impact
· Purpose of the Fund
o Investment strategy of the LTAF to be defined to invest in mainly assets (i.e. at least 50%) which are long-term and illiquid in nature, or in other collective investment schemes (CIS) which invest in such assets
· Investment Powers
o Investment powers to be based on existing rules for Qualified Investor Schemes (QIS)- (investment in specified investments under the RAO, as well as immovable assets and commodities)
o LTAF to have a prudent spread of risk and appropriate diversification- a period of 24 months is proposed to achieve a prudent spread of risk
o Proposal to permit LTAF’s to invest in loans and direct lending, such as part of a lending syndicate, as part of a diversified portfolio of investments.
o LTAF’s will be subject to rules of Assessment of Value
o Principle to be set that the manager should take reasonable steps to ensure that the scheme does not indirectly invest in itself.
o LTAF maximum borrowing level to be set at 30% of net assets
o Manager will have to consider the extent to which the borrowing is consistent with the liquidity profile of the investments and redemption policy of the fund.
o Current FUND 3.9 cover valuation rules in the AIFMD when valuing fund assets
o Proposal is to require the manager to appoint an external valuer unless it can demonstrate that it has the competence and experience to value assets of the type in which the LTAF invests.
o Depositary is responsible for taking reasonable steps to ensure that the scheme is managed in accordance with the rules on valuation. The depositary is required to assess the managers competence to value the schemes assets when the fund applies for authorisation and on an ongoing basis
· Redemptions and subscriptions
o LTAFs are not expected to offer daily dealing but must consider a wider range of liquidity management tools, including notice periods and to disclose their use in the prospectus.
o Suspension should not be used as a means of liquidity management
o Manager of an LTAF will be subject to Articles 46-49 of the AIFM delegated regulation
· Investment Due Diligence
o Managers must undertake due diligence on their investments in line with good practice and to disclose in the prospectus how they do this.
· Knowledge, skills and experience
o Full scope UK AIFM can manage a LTAF
o Evidence of competence, under Article 21 AIFMD must be demonstrated during the authorisation process
· Disclosure of charges
o Disclosure of charging to be made to reflect the complexity in some illiquid strategies and therefore associated costs may differ. LTAFs to disclose examples of how performance fees will operate (equivalent to the requirement for UCITS and NURS in COLL 4.2.5R(13)
o Additional requirement proposed for fund managers of LTAFs to assess and publicly report on:
§ Valuation of investments
§ Due diligence
§ Conflicts of interest
§ Liquidity management
o LTAF manager should produce a report, as part of the annual report, similar to the Assessment of Value reports explaining how the additional requirements have been satisfied
The FCA is in dialogue with HMT and HMRC to determine if there are any tax implications if an LTAF’s activities amount to trade for tax purposes.
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