The Financial Conduct Authority (FCA) has published its long-awaited feedback statement on patient capital and authorised funds (FS20/2), which includes its latest thoughts on the Investment Association’s (IA) proposal for a new long-term asset fund (the LTAF).
FS20/2 follows the FCA’s December 2018 discussion paper on this topic (DP18/10), in which the FCA sought industry feedback on whether there are any unnecessary barriers to investing in patient capital (i.e. long-term and illiquid assets, such as private equity) through authorised funds.
Key points to note from FS20/2 include the following:
- for professional and sophisticated investors, the current authorised funds regime appears to be fit for purpose generally to facilitate investment in long-term assets and there are no inappropriate barriers;
- there are barriers that limit the range of investment options for retail investors, but it is not clear how such barriers could be relaxed without introducing a degree of risk that is inappropriate. The FCA also notes that retail investors can already access long-term investments through other products, such as investment trusts;
- due to complex suitability and operational requirements, there has been limited interest in specialist fund regimes such as the European long-term investment fund (ELTIF); and
- the FCA is exploring liquidity management tools (such as pricing adjustments and notice periods) that could help funds manage liquidity in ways that avoid systemic risk and detriment to investors, in its work with the Bank of England’s Financial Policy Committee (FPC). This is in addition to the FCA’s September 2019 policy statement on illiquid assets and open-ended funds (see our previous blog).
This is all very helpful feedback but in order to make this asset class more accessible to “mass affluent” and defined contribution investors, change is required.
Chapter 7 of FS20/2 summarises the IA’s LTAF proposal, which involves adapting the existing non-UCITS retail scheme (NURS) framework to accommodate a new specialist open-ended authorised fund for investing in long-term assets, while maintaining an appropriate degree of investor protection. Key features of the LTAF would include both flexible dealing frequency and investment and borrowing powers.
As expected by some fund managers, the FCA has confirmed that it will not be consulting on the LTAF proposal just yet, despite in-depth discussions with the IA over the past few months. Instead, the FCA invites the IA to continue its work, in particular on how the LTAF would use liquidity tools to ensure that redemptions are met in line with investors’ expectations. The FCA also calls for a clear definition of in-scope assets for the LTAF, to assess whether sufficiently reliable and fair valuations can be achieved for each asset and what a prudent spread of risk would look like.
Fund managers should therefore bear in mind that the regulatory landscape for investing in illiquid assets through authorised funds is still developing. While the LTAF is not immediately imminent, it is certainly still on the horizon and we expect it to tie-in with the FCA and FPC’s wider work on addressing the so-called “liquidity mismatch” between authorised funds and their underlying assets.