The Financial Conduct Authority (FCA) in the UK is to delay decisions on reforming open-ended property funds as it shifts attention to the creation of a new long-term asset fund (LTAF).
Proposals made last year to introduce redemption notice periods to open-ended property funds have met with widespread concern from the investment industry, and the UK regulator has acknowledged that some of the problems highlighted would also apply to the LTAF.
The FCA is seeking to bring to an end to recurring liquidity crunches among open-ended property funds by introducing 90 or 180-day notice periods, but it has been warned that this risks diverting significant investment away from the funds unless other issues are resolved.
Today, the regulatory body commenced a consultation on the LTAF – which has long been proposed as a way of increasing DC pension investment in illiquid assets – and recognised that it needed to address whether “the wider ecosystem can operationally support the LTAF as a non-daily dealing fund”.
In the LTAF consultation document, the FCA said: “This could lay the ground for other non-daily dealing funds in the future. As the implementation of notice periods for property funds potentially poses similar operational difficulties to the LTAF, we will not take a final decision on whether to introduce notice periods for open ended property funds until we have received feedback from the LTAF consultation.”
The FCA said it would not take a final decision on its policy decision regarding open-ended property funds before the third quarter of 2020.
The regulator received 70 responses to its consultation on property funds from a range of industry participants – including investors, fund managers, life assurance providers, agents, platforms, wealth managers, property valuers and pension specialists – and only “a smaller number agreed with the proposal of notice periods”.
However, more than half of respondents who “expressed a clear positions” supported the proposals “in principle”, subject to the wider “ecosystem” that supports and distributes investment funds “being able operationally to support notice periods” and that the funds remain eligible for individual savings accounts (ISAs).
Others argued that imposing mandatory notice periods would “substantially reduce investor and adviser demand” and “trigger substantial outflows from property funds, leading to the kind of liquidity crisis we were trying to avoid”.
Those who supported the proposals said notice periods would improve consumer protection and “encourage long-term thinking among investors”.
The FCA said that, if it proceeded with applying mandatory notice periods, it would allow for an implementation period, probably between 18 months and two years.
Paul Richards, managing director of the Association of Real Estate Funds, said: “We welcome the considered response from the FCA and support its three main conclusions, including: aligning this work with that of the LTAF as a solution to allow DC default funds access to illiquid assets including property, on the need to address operational difficulties in the surrounding investment ecosystem, and for a suitable transition period to implement any such changes.”
Independent consultant John Forbes said: “I am pleased to see that this is moving forward, and that the FCA is taking on board many of the comments in feedback on both property funds and the LTAF proposal.
“It is good that the FCA are considering a change to the deferral rules for redemptions, as this is something that I have been banging on about since 2017, and also that a significant implementation period will be allowed for any changes to the property fund rules.
“I think the introduction of the LTAF could create a significant pool of capital so it is also good that this is being moved forward and that the FCA accepts that eligibility should be wider than just DC pension funds.”
The investment industry has until 25 June to respond to the consultation on the LTAF, which was originally proposed by the Investment Association in 2019 and was named last year by UK Chancellor Rishi Sunak as a priority for 2021.
The FCA said the aim was to “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 LTAF would be able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure, often referred to as productive finance.
Nikhil Rathi, CEO of the FCA, said: “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.”
Chris Cummings, CEO of the Investment Association, which originally proposed the LTAF, said he welcomed the consultation.
“We believe the LTAF can offer a significant additional way for long-term investors to access illiquid investments with appropriate protections, building on the established investment fund model,” he said.
“We look forward to continuing to work with regulators and stakeholders to make the LTAF a success as part of the wider initiative to boost the supply of productive finance for the UK economy.”
Melville Rodrigues, head of real estate advisory at Apex Group, said “The consultation – combined with the Chancellor’s commitment to legislate so the UK’s first LTAF will be up and running this year – means the LTAF will be within months a UK fund game-changer.
“The FCA usefully proposes amendments to the permitted link rules to enable pension schemes to consider the proportion of real estate and other illiquid assets across their investment portfolios. The amendments facilitate LTAFs being entitled strategically to commit into such assets.
“This strategy will be enhanced if HM Treasury also addresses the current gap the UK fund offering, and legislates for an onshore closed-ended or hybrid professional investor fund.”
Rodrigues, who has been championing a new onshore, closed-ended vehicle, said the Treasury should also legislate for the professional investor fund “on the same timeline as the LTAF”.
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