UK regulator delays open-ended property review as it unveils new fund type
The Financial Conduct Authority has unveiled plans for a new fund structure to overcome much-publicised serious problems of the current array of open-ended structures in dealing with illiquid assets such as property or infrastructure.
But in doing so, it has also delayed the outcome of the FCA consultation on open-ended property funds.
The so-called new long-term asset fund (LTAF), already mooted earlier this year, would provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets, the FCA announced in a consultation paper today (7 May).
We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity."
These funds would be open-ended and able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure, it said.
The FCA argued in the paper that some investors prefer investing in open-ended funds where there are opportunities to put money in or take it out at the net asset value of the assets.
"However as seen with property funds, open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors", it said.
To address this important issue, the key features of the LTAF will be expected to include longer redemption periods, high levels of disclosure, and specific liquidity management and governance features.
The FCA said these would take account of the types of risk to which LTAFs might be exposed and help give investors confidence that they are being managed appropriately and in their interests.
FCA chief executive Nikhil Rathi said: "It is important for overall economic growth that the financial system supports investment that may take time to deliver a return. This is in addition to the potential benefit to investors themselves.
"We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.
"This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who under current fund structures, find it difficult to invest in these types of assets."
He added: "Nevertheless, it is important that the LTAF commands the confidence of target investor groups and can meet their needs. We therefore propose rules to secure an appropriate level of consumer protection and to address specific risks related to investments in illiquid assets."
The FCA has also set up the Productive Finance Working Group together with HM Treasury and the Bank of England to consider how to ensure that the wider ecosystem can operationally support the LTAF as a non-daily dealing fund.
This could lay the ground for other similar funds in the future, it said, and the working group is aiming to draw its conclusions in July 2021. In making final rules, the FCA said it will consider any recommendations of the Productive Finance Working Group.
The consultation is open for feedback until 25 June 2021.
The regulator further recognised that its work on notice periods for property funds and the LTAF have several areas of consideration that overlap. It has therefore also published today (7 May) the feedback to the property fund consultation and updating on next steps.
Ryan Hughes, head of active portfolios at AJ Bell, commenting on the delay to the outcome of the FCA consultation on open-ended property funds, said:
"The consultation on the liquidity mismatch on property funds, with its proposals to put in place a notice period for redemptions, was controversial not least because of the operational challenges that it clearly presented and the very real risk that it would have potentially caused property funds to once again suspend as investors rushed to exit before any notice periods kicked in.
The news that the FCA is delaying the conclusion of the consultation and linking it in to a consultation on Long Term Asset Funds shows just how hard property asset managers have lobbied for the FCA to take a different approach.
"However, the initial proposals haven't been completely discounted and may well still come back on the table when the FCA reports back later in the year. The simple fact that two property funds remain suspended and have been for over a year, while many others hold more than 20% cash to meet potential short-term redemptions still implies that the current structure needs addressing sooner rather than later.
He added: "Rolling the review into a broader one on long term assets is sensible in that it is looking broader than just property but the thousands of investors that currently have around £12bn in commercial property funds will surely want clarity on the liquidity rules sooner rather than later."
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