14 Dec 2021
The Long Term Asset Fund: ready to launch?
Since the Chancellor announced the proposed introduction of the Long Term Asset Fund (LTAF) in November 2020, work has been underway, at pace, to ensure that the framework is up and running to enable firms to introduce these new fund types by the end of 2021. The Treasury’s intention from the outset has been that, by the end of this year, any firm wishing to introduce an LTAF should be able to do so.
NatWest Trustee and Depositary Services (NWTDS) supports the introduction of this new fund type and has been following the development of the LTAF closely with clients through our regulatory engagement sessions: our previous two editions of Depositary Insights have tracked the key themes. Now we are able to provide a more detailed overview, following the publication of the policy statement on 25 October.
As a reminder, the purpose of the LTAF is to enable wider access to investment opportunities in assets such as infrastructure and private equity. This is aligned with the aims of the Productive Finance Working Group which has endorsed the LTAF as a means of enhancing the attractiveness and competitiveness of the UK as a funds domicile.
Regulatory developments such as the establishment of a wholly new fund type can typically be rather lengthy processes, and so the LTAF stands as an example of how government, regulators and industry can work together efficiently to bring a new product to market. In particular, it is notable that the implementation period between publication of the policy statement and introduction of the new rules was just three weeks: a remarkable turnaround time, but one which ensures that the FCA meets the Chancellor’s aspiration of LTAFs being available to launch by the end of this year.
The level of uptake for LTAFs does remain to be seen at this stage, and the authorisation process will create a lag period between adoption of the new rules and ‘go-to-market’ of new fund launches. However, some firms will be keen to take the lead and achieve a ‘first mover advantage’.
The publication of the policy statement has provided firms with all they need to consider going through the authorisation process; albeit there are still areas which the FCA intends to consult on in H1 2022.
Composition and redemptions
Initially, LTAFs will be aimed at Direct Contribution (DC) pension scheme investors as well as sophisticated and high net worth investors. The policy statement confirms the position in terms of composition of LTAFs: 50% of the portfolio is to be comprised of assets defined as ‘long-term’ (e.g. infrastructure investments). This figure is not, however, one which will need to be monitored on a daily basis: the FCA has acknowledged concerns raised as part of the consultation process as to how composition will be monitored and clarified that the figure relates to the model portfolio.
In terms of redemptions, LTAFs will permit redemptions with a 90 day notice period, on a frequency of no more than once per month. This has wider implications than the LTAF: the policy statement indicates that the 90 day notice period is likely to be introduced for open-ended property funds as well, with confirmation of this expected in due course.
Borrowing powers will be set at 30% of the net asset value (NAV). Here the LTAF differs from similar fund types such as qualified investor schemes, where borrowing powers sit at 100% of NAV. It should also be noted that the LTAF is not itself a QIS but is its own fund type, with its own section of the Handbook.
Registration of assets and assessment without qualification
The FCA has said that it plans to consult on amending the requirement for the depositary to be the legal owner of an LTAF’s non-custodial assets. In the meantime, where a firm wishes to establish an LTAF, the FCA will consider applications to modify or waive this requirement.
In terms of assessment ‘without qualification’, the FCA has altered the requirement for the depositary to make a determination without qualification that the AFM has the knowledge, skills and experience required to value the assets independently. Instead the FCA will require the depositary to determine that the AFM has the resources and procedures for carrying out a valuation of the assets.
The FCA will consult in 2022 on proposals to amend the rules further to enable a broader range of consumers to invest in LTAFs in a controlled way.
Consultation on registration of assets and assessment without qualification is also expected in the first half of 2022.
We support the LTAF in principle and will assist firms looking to launch. We have engaged throughout the process and have monitored developments since the Chancellor’s speech in November 2020; we responded to the consultation paper earlier this year, and see LTAFs as a key aspect of the plans to enhance the attractiveness of the UK as a funds domicile. We speak to clients on this subject regularly and have a good understanding of the spectrum of opinion across the industry. We look forward to continuing to engage as LTAFs evolve, both in terms of launches and the subsequent consultations.
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