In 2021, The FCA made rules for a new authorised fund vehicle, the long-term asset fund (LTAF).
An LTAF is an authorised open-ended fund that allows UK investors to access long-term illiquid assets. It is permitted to invest in a wide range of assets, including venture capital, private equity, private debt, real estate and infrastructure. The liquidity profile of these assets is not suitable for open-ended funds that offer daily dealing, so The FCA’s rules place high regulatory standards, as well as restrictions, on an LTAF’s dealing structure. This ensures retail investors and defined contribution (DC) pension schemes can invest in them with confidence.
Model Instrument of Incorporation & ACS Co-ownership Deed for LTAF
A revised model LTAF Instrument of Incorporation and a model LTAF Co-Ownership Deed for Authorised Contractual Schemes (ACS) have been produced by Simmons & Simmons LLP for the Productive Finance Working Group. The model instrument and deed may be used by applicants preparing legal documents to form an LTAF.
Amending NURS second scheme rules to facilitate LTAF investment
In FCA Handbook Notice No.125 the FCA confirmed that they would be making the following changes to non-UCITS retail schemes (NURS) second scheme rules to facilitate LTAF investment, effective from 20 December 2024.
- COLL 5.6.10R(3) would be amended so that it does not apply when the second scheme of a NURS is a LTAF.
- COLL 5.6.10R would be amended so that the 20% exposure limit applies globally to any combination of holdings in LTAFs, qualified investor schemes, unregulated schemes and unapproved securities. 3.45 3.46 3.47 3.48 3.49 3.50
- Provisions would be added to COLL 5.6 in line with existing provisions in COLL 5.7.7R(3) and COLL 5.7.7AG(2) for NURS FAIF managers. FUND 3.6.2R and FUND 3.6.3R provide important overarching rules for how all AIFMs must approach the investment strategy, liquidity profile and redemption policy of AIFs they manage. The proposed additions to COLL 5.6 set out specific requirements relating to investments in LTAFs by NURS, so that NURS managers have sufficient control and oversight over the illiquid LTAF investments in their portfolio.
- Minor amendments would be made to the existing provisions at COLL 5.7.7R(3) and COLL 5.7.7AG(2) to clarify the expectations placed on NURS FAIF managers, in line with the FCA's proposed provisions for NURS managers at COLL 5.6.10DR and 5.6.10EG. The FCA clarified that COLL 5.7.7R applies only in relation to NURS FAIFs, NURS FAIFs are not subject to the 20% limit in LTAFs set out in COLL 5.6.10R.
These amendments were consulted on in the FCA's Q3 2024 Consultation (CP24/18). In AREF's response, AREF supported the FCA addressing this barrier to DC pension schemes using NURS to make allocations in LTAFs and looked forward to other barriers being addressed. Also, AREF advocated for a broader review of the second scheme rules and amendment to COLL rules so property doesn't need to be held in the name of the depositary or its delegate.
Access to the Financial Services Compensation Scheme (FSCS)
Within the FCA's PS23/7: Broadening retail and pensions access to the long-term asset fund, the FCA consulted on whether the LTAF should be in scope of the FSCS. AREF submitted a response to this consultation in which AREF disagreed with the FCA's proposals to exclude the LTAF from the protection of the FSCS.
On 30 October 2023, the FCA confirmed in FS23/7: Long-Term Asset Funds (LTAFs) – Financial Services Compensation Scheme Coverage Feedback Statement that they have decided not to take forward the proposal to exclude FSCS cover for regulated activities relating to LTAFs at this time.
The FCA now propose to consider any changes to the scope of FSCS protection for retail investments in the round, rather than excluding activities relating to certain investment products in isolation.
Broadening retail and pensions access to the LTAF
In June 2023, the FCA published PS23/7: Broadening retail and pensions
access to the long-term asset fund. Updated rules came into force on 3 July 2023. More details about the Policy Statement can be found here.
FCA's LTAF rules and guidance
The FCA have a webpage setting out the rules and guidance that apply to LTAFs around valuation and pricing. This aims to help trustees and other potential investors in LTAFs understand the basis on which LTAFs are priced.
FCA COLL rules for the LTAF
Following on from their consultation (CP21/12) on a new category of authorised open-ended fund called the long-term asset fund (LTAF), the FCA published their Policy Statement (PS21/14).
The LTAF has its own distinct chapter (COLL 15) in the Collective Investment Schemes sourcebook, which forms part of the FCA Handbook. The final Handbook text can be found in Appendix 1 of the Policy Statement. The new Handbook rules and guidance came into force on 15 November 2021.
More details can be found here.
Author
