The UK government has set out proposals to reform the country’s funds sector, which could spur the emergence of long-term asset funds (LTAFs), the creation of new onshore closed-ended funds for professional investors and a more flexible regime for real estate investment trusts (REITs).
The UK Treasury on Thursday published its formal response to a call for input for its review of the UK funds regime, as part of ongoing post-Brexit efforts to bolster the £11trn (€13trn) sector.
It comes less than four months after the Financial Conduct Authority published rules to allow for the introduction of LTAFs, a new type of authorised fund for investing in illiquid assets.
The introduction LTAFs was one of three areas most frequently cited by respondents as top priorities for the review, and the government said it was “continuing to explore any further changes to the way that LTAFs are taxed” and would continue discussions with the industry.
“The government believes that the LTAF has the potential to help foster a long-term investment culture and thereby deliver good outcomes for investors, aid the economic recovery, and support the government’s wider productive finance agenda,” it said.
The second most frequently cited area for reform was to fill a gap in the UK’s current fund offering by creating a new onshore, closed-ended fund structure for professional investors.
The government said it would “conduct further work to explore options” to introduce “internationally attractive onshore professional investor regime of unauthorised fund structures”.
The case for such a structure, which could encourage managers of closed-ended real estate funds to move away from offshore vehicles, was made by industry bodies two years ago.
“The responses to the call for input are persuasive that an unauthorised contractual scheme would strengthen the UK’s fund offering,” the government said. “It has the potential to lower the barriers for SME asset managers to launch new products, to increase the number of unauthorised closed-ended investment vehicles domiciled in the UK and to support the government’s work to promote investment in longer-term, less liquid assets.
“The government is also conscious that professional investors have – both in their responses to the call for input and previously – highlighted the value of the option for an onshore structure. The government will therefore conduct further work to explore options to include unauthorised contractual schemes in the UK’s funds offering.”
Melville Rodrigues, head of real estate advisory at Apex Group, who has been advocating the creation of a professional investor fund since 2019, said the proposal “plugs a gap in the existing UK funds regime”.
Rodrigues said: “UK fund managers – particularly operating within the real estate sector – can look forward to operating unauthorised closed-ended investment vehicles onshore, no longer dependent on going offshore.”
He added: “The unauthorised contractual scheme will facilitate more investment in long-term UK assets, enable fund management houses to drive the UK government’s levelling-up goals and enhance the UK’s brand for fund and asset management. This is a win-win collaboration for government and the fund industry.”
The government also revealed that it would continue to evalute further reform of real estate investment trusts (REITs) after the industry called for more flexibility in the rules and in the types of assets they can hold “to make it easier for UK REITs to be launched on behalf of major overseas and domestic investors”.
REITs have already been subject to changes, including the lifting of the requirement for REITs to be listed if certain types of institutional investor hold at least 70% of their ordinary share capital.
“Given the strong stakeholder support for further reform to the REIT regime, the government will establish a new workstream as part of the UK funds regime review to further evaluate the options,” the government document said.
