FCA launches long-term asset fund consultation

The FCA has published the feedback to its consultation paper on the liquidity mismatch in authorised open-ended property funds, and subsequently launched a consultation on a new long-term asset fund (LTAF) category.

The authority began its consultations on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds back in August 2020.

It looked at whether property funds should be required to have notice periods before an investment can be redeemed, and asked for any alternative proposals.

The FCA believes its suggested approach — a notice period of between 90 and 180 days — would have numerous benefits, including reducing the risks to fund investors and the wider economy of pressure to sell fund assets at speed, rather than maximum price, in order to meet redemption requests.

The watchdog feels that this will allow funds to be more efficient and enable them to hold less cash to manage the liquidity mismatch and therefore boost investors’ returns.

The FCA received 70 responses from a wide range of stakeholders, including fund managers and depositaries, life assurance providers and those involved in the distribution chain (transfer agents, platforms, advisers, wealth managers, property valuers and pensions specialists), as well as individual investors.  

Stakeholders raised concerns around the operational challenges for fund managers and other firms — particularly in relation to ensuring that the infrastructure to support purchase and sale of holdings by retail investors will work seamlessly with notice periods. 

They also highlighted the need to address operational challenges to make progress on new options for a LTAF.

Following this, the regulator has today (7th May) launched a consultation on the LTFA.

The FCA is proposing that these funds would be open-ended and able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure.

The aim of the LTAF would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets, as the fund structure is specifically designed to accommodate relatively illiquid assets.

The authority confirmed it would not take a final decision on its policy position on property funds until Q3 2021 at the earliest, in order take feedback to the LTAF consultation into account.

It also stated that should it proceed with applying mandatory notice periods for property funds, it would allow a suitable implementation period (approximately between 18 months and two years) before the rules come into force to allow firms to make operational changes.

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