FCA consults on Long-Term Asset Fund regime
The Financial Conduct Authority today set out final rules for the Long-Term Asset Fund regime, creating a new authorised open-ended structure for investment in illiquid assets and confirming a start date for the Handbook chapter governing the funds. The framework is aimed at enabling defined contribution pension schemes to access long-term assets under a tailored liquidity, borrowing and governance rulebook.
New LTAF structure and rulebook location
The Long-Term Asset Fund is defined as a distinct category of authorised open-ended fund designed to invest efficiently in long-term illiquid assets. The regime will sit in a standalone chapter, COLL 15, within the Collective Investment Schemes sourcebook of the FCA Handbook. The new rules and guidance in COLL 15 are scheduled to come into force on 15 November, following the publication of Policy Statement PS21/14.
Liquidity terms and dealing constraints
The FCA has built specific liquidity constraints into the Long-Term Asset Fund design, including a mandatory notice period of at least 90 days for redemptions. In addition, Long-Term Asset Funds will not be permitted to offer redemptions more frequently than monthly, aligning dealing terms with the underlying asset profile.
Borrowing limits and investment build-out
In Consultation Paper CP21/12, the FCA proposed capping fund-level borrowing for Long-Term Asset Funds at 30%, as part of a wider package of changes to investment and borrowing powers. The consultation also set out a now-abandoned proposal for a 24‑month period during which limits on investments would not apply, which the FCA has removed in the final rules in PS21/14.
Manager eligibility and governance expectations
CP21/12 proposed restricting management of Long-Term Asset Funds to firms that can demonstrate relevant experience and are categorised as full-scope UK alternative investment fund managers. The consultation also outlined a suite of disclosure and governance requirements for Long-Term Asset Funds, covering fees, portfolio changes, valuation, due diligence, subscription and redemption policy, and liquidity management.
Pension access and permitted links changes
The FCA has confirmed in PS21/14 that the Long-Term Asset Fund rules are intended to provide sufficient investor protection to enable defined contribution pension scheme investment in the structure. CP21/12 proposed amendments to the permitted links and conditional permitted links rules in COBS 21.3, and related provisions, to allow defined contribution pension arrangements to invest in Long-Term Asset Funds.
Adjustments from consultation to final rules
Alongside removing the proposed 24‑month investment limits waiver, the FCA has made the rules on the types of permitted loan for Long-Term Asset Funds less prescriptive in the final policy statement. PS21/14 also drops the earlier proposal that a second scheme investing in a Long-Term Asset Fund must itself have a prudent spread of risk.
Development process and future retail access
The Long-Term Asset Fund regime has been developed with input from the Productive Finance Working Group, which brings together the FCA, the Bank of England, HM Treasury and industry participants. The FCA has said it plans to consult in the first half of 2022 on whether to enable a broader range of consumers to invest in Long-Term Asset Funds in a controlled way, extending beyond the initial focus on defined contribution pensions.
The next key decision point will be the FCA’s planned consultation on widening consumer access, which will determine how far the Long-Term Asset Fund structure moves beyond institutional and pension scheme investors.
--- Sources: https://www.fca.org.uk/ https://www.aref.org.uk/resource/fca-ps21-14-a-new-authorised-fund-regime-for-investing-in-long-term-assets-ltaf.html https://www.fca.org.uk/publications/policy-statements/ps21-14-new-authorised-fund-regime-investing-long-term-assets
