The Financial Conduct Authority (FCA) has launched a consultation on a new type of fund aimed at facilitating investment in illiquid assets by defined contribution (DC) pension schemes, indicating the long-term asset fund (LTAF) would be a non-daily dealing fund.
It also revealed it was delaying decisions on reforming open-ended property funds, and said it would take feedback on the LTAF proposal into account when finalising its policy.
Originally proposed by the Investment Association (IA), under the regulator’s proposals the LTAF would be open-ended and able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure.
Because of the potential for harm to investors from liquidity mismatches in open-ended funds with frequent (typically daily) dealing, the FCA is proposing that LTAF rules “embed longer redemption periods, high levels of disclosure, and specific liquidity management and governance features”.
“It is important for overall economic growth that the financial system supports investment that may take time to deliver a return,” said Nikhil Rathi, FCA chief executive officer. “This is in addition to the potential benefit to investors themselves.
“We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.”
He added: “This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who under current fund structures, find it difficult to invest in these types of assets.”
The FCA is proposing to integrate the LTAF into the regulatory framework for the investment by DC pension schemes in unit-linked long-term insurance products, via amendments to so-called permitted links rules.
It said it was proposing to amend these rules to enable pensions schemes to consider the proportion of illiquid assets across their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest.
A specific proposal is to remove a 35% limit on illiquid investments where an LTAF fund forms part of the default arrangement of a pension scheme.
The FCA also said that wider questions needed to be addressed to create an environment in which investment in longer-term, less liquid assets could “flourish”.
It said that the Productive Finance Working Group (PFWG), convened by the FCA with the government and the Bank of England, was considering “how to ensure that the wider ecosystem can operationally support the LTAF as a non-daily dealing fund”.
In its consultation document, it said that respondents to its August 2020 consultation on property funds, in which it proposed a move to notice periods of between 90-180 days, noted that much of the wider operational infrastructure around the distribution of open-ended funds currently only supports daily dealing funds.
DC investment solutions tend to be delivered through investment platforms provided by life insurers, and these platforms have been built to deliver daily liquidity.