On May 7, the Financial Conduct Authority (FCA) published a consultation paper on a new UK-authorized fund regime for investing in long-term assets (CP21/12). These assets are often called productive finance and include venture capital, private equity, private debt, real estate and infrastructure investments.
The FCA proposes a new category of open-ended fund called a long-term asset fund (LTAF). A new chapter in the Collective Investment Schemes sourcebook will contain LTAFs rules. Authorized fund managers will also need to comply with rules in other sourcebooks, including PRIN, FUND, COBS and SYSC.
LTAFs will be alternative investment funds (AIFs). They may make investments in complex and risky assets, which means that their managers will need to have appropriate resources as well as good systems and controls. Therefore, the FCA proposes to require that only firms that are authorized as full-scope UK alternative investment fund managers (AIFMs) can manage LTAFs.
The FCA’s proposed LTAF framework is principles-based, and it does not propose to set many detailed rules. LTAFs will facilitate investment through a UK-authorized fund in assets that are less liquid and potentially higher risk than assets that are available for mainstream retail funds.
Pending feedback, the FCA initially proposes to restrict the LTAFs distribution to professional investors and sophisticated retail investors. However, the proposed rules enable wider distribution if the FCA subsequently decides that this would be appropriate.
The FCA plans to enable LTAFs to invest in a range of long-term illiquid assets, with few restrictions on eligible investments. It proposes additional disclosures to help potential investors understand the management of the fund and explain its important features.
The FCA also proposes to amend the permitted links rules in COBS 21.3 to allow defined contribution pension schemes to invest in LTAFs.
Appendix 1 to CP21/12 contains the draft Long-Term Asset Fund Instrument 2021, which will amend the relevant rule.
CP21/12 closes on June 25. The FCA plans to publish a policy statement and final rules later in 2021.