Regulators are proposing safeguards for investors in chancellor Rishi Sunak’s planned long-term asset funds (LTAFs) for financing infrastructure amid concerns that savers could be trapped in illiquid portfolios.
Announcing a consultation on Friday, the Financial Conduct Authority said it was working on the funds being open-ended — meaning that the underlying assets would be valued so investors could flexibly buy and sell holdings.
But the regulator is proposing special rules to protect investors, acknowledging worries that the underlying assets would often be illiquid, with investments in venture capital, private debt and property, as well as infrastructure.
In particular, it suggested the LTAFs — unlike most open-ended funds — may not be traded on a daily basis, a move that would give managers more time to adjust to market shifts.
Nikhil Rathi, FCA chief executive, said that the regulator, together with the Treasury 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”.
The consultation follows shocks suffered last year by retail investors in property funds, many of which suffered a rush of redemptions in the market crash at the start of the pandemic — and temporarily closed their doors.
Despite this setback, Sunak announced last November that he wanted Britain’s first LTAFs launched within 12 months. While investors can already invest in long-term assets via closed-end funds such as investment trusts, the government is keen to widen the investor pool.
The FCA plans to manage illiquidity risks by proposing that LTAF rules embed longer redemption periods than normal for open-ended funds, high levels of disclosure and “specific liquidity management and governance features”.
The FCA said: “As seen with property funds, open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors.”
But the plans divided the investment industry. Moira O’Neill, head of personal finance at fund supermarket Interactive Investor, said: “While these proposals require open-ended funds to match the underlying liquidity of the assets in which they invest with the redemption terms that they offer to investors, there is no guarantee that this approach will be entirely successful when it comes to managing liquidity risks.”
Ian Sayers, chief executive of the Association of Investment Companies (AIC), which represents investment trusts, questioned whether managers could fairly value the underlying assets and “set a fair price for investors entering or leaving the fund”.
However, Chris Cummings, chief executive of the Investment Association, the fund managers’ trade body, welcomed the consultation. “We believe the LTAF can offer a significant additional way for long-term investors to access illiquid investments with appropriate protections,” he said.
The regulator on Friday separately revealed how industry professionals had responded to an earlier consultation on property funds in which it had proposed a notice period of 90 or 180 days for investors redeeming funds. The FCA said the stakeholders had raised “operational challenges”.
Recognising that the property fund and the LTAF moves are linked, the FCA plans to delay any decision on property funds until the third quarter of 2021. The LTAF consultation closes on June 25.