FCA consults on the LTAF

The FCA has published its long awaited consultation on the creation of a Long Term Asset Fund (LTAF). The LTAF is an open-ended authorised fund that is designed to allow a broader range of investors access to private and less liquid assets. After a number of high-profile suspensions of daily dealing funds, the regulator wants to ensure that the investors in the LTAF are able to access the potential for increased investment returns while being sufficiently protected. The consultation proposes rules seeking to achieve this aim.

The consultation contains the following proposals.

• Fund governance and reporting: the Authorised Fund Manager (AFM) must appoint an approved person under the Senior Managers Regime to undertake an assessment as to how the LTAF’s assets have been valued, how due diligence has been undertaken` and how liquidity and conflicts of interest have been managed in the best interests of the fund, investors and the integrity of markets. This assessment must occur in addition to the existing requirement for AFMs to publish an annual value assessment report and ensure that there are enough independent directors on the board.
• Investor disclosures: regardless of the complexity of the LTAF and its investments, the prospectus must include specific disclosures that are fair, clear, not misleading and in plain language.
• Eligible investors: the LTAF may only be marketed to professional investors and sophisticated retail investors but not retail investors more broadly even if those investors are advised. The permitted links rules will be amended to permit DC pension schemes to invest in the LTAF. The FCA suggests that it will consider extending eligibility to other retail investors in the future.
• Eligible assets: the FCA expects at least half of the LTAF’s assets to be invested in unlisted securities, long-term assets and in other funds invested in those assets.
• Investment powers: the LTAF’s powers will be based on the Qualified Investment Scheme (QIS) but it will additionally be able to invest in loans that meet certain conditions and fund of funds. 
• Risk management: the LTAF will be required to have a prudent spread of risk, like a UCITS or a NURS, rather than simply a spread of risk like the QIS.
• Borrowing: borrowing will be capped at 30% of the fund’s total value, higher than the 10% allowed for NURS but less than 100% permitted for the QIS to ensure that borrowing to invest can happen but not to such an extent that liquidity mismatches become more likely.
• Valuation: the LTAF will apply the standards given in FUND 3.9 and in the AIFMD delegated regulation, including the requirement for depositary oversight. Valuation must be done by an external valuer unless the manager can demonstrate its competence to do the valuation itself. The price must be published monthly even if there is no dealing in the fund’s units.
• Redemptions and subscriptions: while the LTAF will not be daily dealing, managers will have flexibility to align their approach to liquidity management, including the use of tools to manage liquidity, the dealing window and limits on the ability of investors to subscribe in or redeem from the funds, with the liquidity of the LTAF’s assets.
• Due diligence: the manager must undertake due diligence of its investments in conformance with good practices and disclose in the LTAF prospectus how this has been done.
• Conditions to operate as an LTAF manager: only full scope AIFMs will be allowed to manage an LTAF. Managers that delegate portfolio management to another firm must ensure compliance with requirements in relation to knowledge, skills and experience.
• Costs and charges disclosure: managers must disclose their fee structure including any performance fees and all costs incurred directly or indirectly by the LTAF.
• Authorisation timescales: the FCA will initially take more than one month but less than six months to authorise an application for an LTAF and encourages firms to engage prior to submitting an application.

The Government hopes the first LTAF will be launched before the end of 2021. The FCA’s consultation period is relatively short, closing on 25 June 2021. The Government and the FCA will take into account the feedback to the consultation in addition to the work of the Productive Finance Working Group, which comprises the authorities and industry representatives and is looking at other market related barriers to the LTAF’s success.