On 7 May 2021, the FCA published Consultation Paper 21/12: A new authorised fund regime for investing in long term assets (CP21/12).

In CP21/12 the FCA sets out proposals for a new category of authorised open-ended fund called the long-term asset fund (LTAF). This is designed to enable authorised funds to be set up to invest efficiently in long-term, illiquid assets.

In summary, the FCA proposes that LTAFs will have their own distinct chapter in the Handbook and this will build on the existing rules for Qualified Investor Schemes (QIS). The QIS regime was set up to allow greater investment flexibility to more sophisticated retail investors and professional investors within a regulated investment framework. The proposed rule changes include:

• various disclosure and governance requirements, including in relation to fees, portfolio changes, valuation, due diligence, subscription and redemption policy, and liquidity management;
• various changes to investment and borrowing powers, including capping fund-level borrowing at 30% and requiring a prudent spread of risk;
• external valuation of the fund’s assets unless the manager demonstrates (and the depositary confirms) competence and experience in valuing the assets;
• minimum valuation frequency for LTAFs;
• restricting management of an LTAF to firms that can demonstrate experience and are categorised as full scope UK AIFMs; and
• restriction on use of LTAF/long-term asset nomenclature.

The FCA is also proposing amendments to the permitted links and conditional permitted links rules in COBS 21.3 and related rules as appropriate to allow defined contribution (DC) pension schemes to invest in LTAFs. This will be effected by changes to the ‘permitted links’ rules. The FCA’s proposed changes to the rules on permitted links include:

• guidance where appropriate for new permitted links category terms to clarify the FCA’s expectations;
• amending and adding to rules where appropriate, for example to enable a wider permitted investment range and to amend the application of quantitative limits where firms meet qualifying conditions; and
• appropriate risk mitigation including risk warnings to consumers to ensure they understand the investment risks involved and a requirement on firms, independent governance committees and DC pension scheme trustees using the greater flexibility afforded by the proposed changes to ensure that investments are offered/taken up in appropriate contexts and that investors are able to exercise contractual rights within a timeframe appropriate to their needs.

The deadline for comments on CP21/12 is 25 June 2021.

The FCA will consider the feedback to CP21/12 and will look to publish a final policy statement and handbook rules later this year.