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Readers of the previous edition of Depositary Insights will be aware that the UK government’s proposed Long Term Asset Fund (LTAF) is something that we have been closely tracking.
Our previous edition included an article setting out the background and initial considerations for the new fund type. Our head of business, Mark Crathern, also contributed to a CityWire article on the subject of the LTAF and how it compares to the European Long Term Investment Fund (ELTIF), noting that there were opportunities to learn from the limited success of the ELTIF to ensure the LTAF is a more attractive, competitive product for the UK funds market. We also expressed support for the LTAF in the HM Treasury call for input on the review of the UK funds regime.
The discussion gained momentum with the publication, on 7 May, of the FCA’s consultation paper (CP21/12) on the LTAF. This was published on the same day as the FCA’s Feedback Statement on liquidity mismatch in open-ended property funds, and as we noted in our previous article on this subject, the two go hand in hand from a policy perspective. It is significant that both the LTAF consultation paper and the liquidity mismatch feedback statement feature the proposal for 90-180 day notice periods.
While the liquidity mismatch proposals are likely to have up to a two year implementation period, the government has committed to have the LTAF up and running by the end of this year: the consultation paper has served to emphasise that the clock is ticking. We had been closely monitoring the development of the policy from the very beginning, so we welcomed the opportunity to share our views on the proposals by responding to the consultation. In this article we will share the key points from our response.
Although the LTAF has been on the radar for many months, it is worth briefly recapping its history and the key features of the proposals. The concept of an LTAF was first mooted through HM Treasury’s Asset Management Taskforce in June 2019. The basic idea was to create a new fund type to allow wider access to long-term investment in areas such as private equity, infrastructure and private debt. The proposals were accelerated when the Chancellor of the Exchequer announced, in November 2020, that the LTAF would be up and running by the end of 2021.
When the Consultation Paper was issued in May, the proposals were largely as expected, but with a number of interesting areas worthy of deeper consideration. At a high level, the FCA’s proposals noted that the product would initially be targeted at direct contribution pension schemes, and would be treated as a Qualified Investor Scheme for distribution. The FCA suggested, however, that the LTAF may ultimately be expanded to a wider customer base. It will have its own chapter in the FCA Handbook and COLL rules, and will need to be managed by a full-scope AIFM. The FCA confirmed that LTAFs will not be daily-dealing. In terms of authorisation timeframes, the FCA noted that it wants authorisation processes to be “without undue delay” and going forward would consider a one-month authorisation period.
The FCA also proposed that LTAFs should be able to borrow up to 30% of net assets, and that depositaries would be responsible for assessing the manager’s competence to value the scheme’s assets. The consultation closed on 25 June. Given the relatively tight timeframe before implementation, we expect the next steps (feedback statements, policy statements, etc.) to appear later in Q3. However, there are things that firms can do to prepare, and as a depositary we have stood up a project to ensure we are prepared to serve LTAFs by the end of the year.
The NatWest Trustee and Depositary Services view
We welcomed the opportunity to respond to the consultation and to share our views. We have also drawn on insights from clients.
Our principle observations were as follows:
- We are supportive of the LTAF, allowing greater access to illiquid assets whilst providing high levels of investor protection and promoting the goals of economic growth and the transition to a low carbon economy.
- We support restricting management of an LTAF to firms that possess the knowledge, skills and experience necessary to understand the activities and associated risks of the LTAF and who are also full-scope UK AIFMs.
- A target market limited to defined contribution pension schemes may be too narrow to make the product commercially attractive in the longer term. We recommended moving quickly to expand the investor base as the risk is LTAFs will have limited commercial appeal as a fund type.
- We support LTAFs being non-daily dealing funds and of having a wider range of liquidity tools, including notice periods to manage the risks around liquidity mismatch.
- Whilst there is an investor protection benefit in registering LTAF assets with the depositary, there are also potential legal, financial and reputational risks and operational complexities associated with their management and as such we propose that the AIF’s custodial assets be registered in the name of the LTAF or in the name of AFM acting for the LTAF, as permitted under FUND and AIFMD.
- We shared concerns about proposals for a “without qualification” determination, which would require depositaries to replicate the fund manager’s asset valuation responsibilities. We argued that this could increase costs for depositaries and fund investors without increasing investor protection.
- We recognise the need for strong governance and note depositaries will have an important role to play, alongside the AFM Board, in ensuring investors are properly protected.
The LTAF has gained a lot of attention across the industry, and the support it has received from the Chancellor has added to the momentum. There is a wide range of views within our client base on LTAFs.
The majority of firms are waiting to see the final rules before deciding whether or not launching an LTAF will be of commercial interest. Key will be the rules on marketing and distribution and it is generally accepted the investor base needs to be wider than defined contribution pension schemes if more than a handful of LTAFs are going to be launched. The administrative and system challenges LTAF’s present should also not be underestimated.