16 Mar 2021
Liquidity and the Long Term Asset Fund
In 2020 the UK regulators turned their attention to liquidity matters – particularly the issue of liquidity mismatch in open ended property funds. This led to Consultation Paper 20/15 from the FCA, which proposed, among other things, the introduction of notice periods between 90 and 180 days.
We await the result of this activity: the Bank of England’s financial stability report should give an indication of direction of travel, followed by subsequent policy statements and potential handbook changes from the FCA. HMRC also issued a consultation on the impact of notice periods on ISAs, and the results of this process are expected in the first half of this year as well.
In the interim, the government has proposed a new type of fund – the Long Term Asset Fund (LTAF). This is aimed not only at addressing the challenges of liquidity mismatch but also at supporting economic recovery from Covid-19.
On 09 November 2020 the Chancellor of the Exchequer confirmed the UK Government’s support for LTAF in a speech before the House of Commons:
“To encourage UK pension funds to direct more of their half a trillion pounds of capital towards our economic recovery I’m committing to the UK’s first Long-Term Asset Fund being up and running within a year.”
With this announcement, the work of delivering the fund has now begun in earnest.
Opportunities and questions
The LTAF brings new opportunities, but there are also plenty of questions to be considered as well. The concept of the LTAF was first proposed in June 2019 by the Investment Association’s Funds Regime Working Group. At the time, the proposal sought to address the challenges of low dividends, low bond yields, and property fund suspensions, while providing more choice to retail investors: the LTAF is intended to broaden access to investment opportunities in infrastructure, housing, small and medium enterprises, private equity, and Patient Capital.
While providing greater choice to retail investors, the LTAF concept also aligns with key policy themes such as economic recovery from Covid-19 and improving the competitiveness and attractiveness of the UK funds landscape post-Brexit. By potentially facilitating greater investment in infrastructure, the fund could help to “build back better” and to “level up” – both key governmental priorities.
The Long Term Asset fund is also intended to address the challenge of liquidity mismatch. By introducing controlled dealing periods, the risk associated with the illiquid nature of the underlying assets and the redemption needs of the retail fund holder are addressed. These issues have been highlighted in recent years through fund suspensions as a result of events such as Brexit and the market volatility caused by Covid-19. The FCA and Bank of England are expected to expand further on this theme when the conclusions of the joint FCA / Bank of England review on liquidity mismatch are published.
Thinking through the details
The specifics, including the operational details of these proposals, will need to be carefully thought through in advance of the proposed launch of this product type later in the year. The FCA is expected to consult on the LTAF in Q1, and the tax treatment of the fund has already been included in HM Treasury’s Call for Input on the future of the UK Funds Regime, which closes on 20 April 2021. The FCA, Bank of England and HM Treasury are also convening a “Productive Finance Working Group” to consider technical aspects of the proposal such as potential barriers to investment, and the roadmap for implementation.
Some of the key questions to emerge so far relate to the structure fund: should it be a Non UCITS Retail Scheme (NURS), as the IA has suggested, or would a Qualified Investor Scheme, as the FCA has suggested, be more appropriate?
And is the LTAF significantly differentiated from other product types that are currently available? In its Feedback Statement (FS 20/2) to the consultation on patient capital and authorised funds, the FCA noted that while respondents had argued that NURSs and UCITS currently had limited scope to invest in long-term assets, they did not in fact identify any infrastructure assets in which authorised retail funds could not currently invest.
There is also the question of the similarly-named Long Term Investment Fund (LTIF), and the European Long Term Investment Fund (ELTIF). These were established in 2015 as closed-ended investment companies (with limited exceptions) but have not proved particularly popular: there are 28 in total across the EEA with an asset base of €2bn, and no firms have sought authorisation from the FCA to open such a scheme in the UK.
As the working group begins to focus on the technical details of how LTAF will work, and as respondents reflect on the contents of the upcoming consultation, a key consideration will be around how the LTAF can advance the interests of the end investor, especially given the proposed dealing periods. HMRC has called out the potential introduction of notice periods for property funds as meriting further investigation, in terms of whether these are in the best interests of investors who own units in such funds through stocks and shares ISAs5. The success of the LTAF will depend on being able to demonstrate that it is of benefit to investors and an attractive proposition.
The funds industry has a role to play in directing resources towards economic recovery, in addressing liquidity mismatch, and in enabling greater investment in assets with a focus on long-term value. The LTAF is a concept which can trace its roots partly to the Patient Capital Review, and it has seen its relevance and potential grow as a result of Brexit and Covid-19. After the Chancellor’s speech in November, it is now at the crucial point of transitioning from theory to reality.
- Some firms are already offering products to clients that meet many of the objectives of the LTAF, while for others it represents an opportunity to introduce a new product type. Engaging with the consultation paper when it is issued will provide an opportunity to shape the policy and act as a thought leader.
- A key concern will be the attractiveness of the LTAF as a new product type, and avoiding the issues that resulted in low uptake of the LTIF and ELTIF models.
- We recognise therefore that while the LTAF may bring new revenue into authorised funds in the form of pensions investments, there are also some questions to be addressed related to having LTAF within an open ended structure. The proposed fund structure will be key.
- NWTDS is engaged with industry discussions on this issue and will work closely with clients to support their product development plans.
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