Overview: 

In October 2021 the FCA published Policy Statement (PS21/14) finalising the rules for the UK Long Term Asset Fund (LTAF). The LTAF rules and guidance came into force on 15 November 2021. Key features of the rules include:

• LTAFs are open-ended funds that invest in long-term, illiquid assets such as private credit, VC, PE, RE and infrastructure
• LTAFs are required to invest more than 50% of the fund in unlisted securities and other long-term assets
• LTAFs are permitted to invest in loans
• LTAFs permitted to invest in other funds subject to some safeguards
• Distribution will be open to both professional clients as well as retail clients
• Borrowing set at 30% of net assets
• Only authorised full-scope UK AIFMs are permitted to manage an LTAF with LTAF managers also expected to meet additional requirements
• Minimum standards on redemptions, no more frequent than monthly and only after a minimum 90-day notice period;

In August 2022 the FCA published a consultation paper (CP22/14) which set out its proposals for broadening retail access to the LTAF.  The main changes being proposed by the FCA include:

• Recategorising the LTAF as a Retail Mass Market Investment (RMMI) as opposed to a Non-Mass Market Investment (NMMI)
• Enabling a NURS FAIF to invest up to 35% of its value into units of a single LTAF and up to a maximum of 50% of its value in LTAFs in total
• Creating new specific disclosure requirements for LTAF distributors
• Extending some rules from UCITS schemes and NURS to LTAFs that receive investment from consumers classified as restricted investors
• Extending the distribution of LTAFs and other illiquid assets to Defined Contribution (DC) pension schemes by:
  • Permitting the distribution of LTAFs via self select options in qualifying schemes, subject to similar protections to those that currently apply to default arrangements
  • Extending the distribution of LTAFs where investors have professional support on fund selection; and
  • Giving LTAF-equivalent status to other illiquid assets where the unit linked product is part of the default arrangement of a qualifying scheme

In June 2023 the FCA published a policy statement (PS23/7) which finalises rules for retail access to the LTAF. Several changes have been implemented following the consultation, with key changes including:

• The risk warning / summary text has been amended to focus on liquidity over investment risk.

• Fund-of-funds exposure limits have been raised permitting NURS Fund of Alternative Investment Funds (NURS FAIF) to invest up to 35% of its scheme property in a single LTAF. NURS FAIF can invest more than 50% of its scheme property in LTAFs if it operates limited redemption arrangements to manage liquidity

• Third party valuation rules have been modified in line with valuation requirement for NURS
• Retail investor protection rules have additional requirements for retail investors including engagement with unitholders about significant fund changes, arrangements for unitholder meetings and the register of unitholders, investor updates, and restrictions on payment types and charge

Several changes have been made concerning pension distribution requirements including:

• Non-advised investors can now access long-term unit-linked products, including non-workplace schemes and non-qualifying workplace schemes
• The restriction of 35% on illiquid assets in unit-linked fund structures within the default arrangement of a qualifying scheme has been removed
• Consumers holding LTAFs in self-selected pensions or SIPPs will receive a notification informing them about the illiquid nature of their holdings as they near retirement age

The new rules and guidance will come into force July 3 2023. A transitional period for authorised fund managers (AFMs) to implement changes extends until July 3 2024.

For further information please contact Nicholas Smith ([email protected])

(Last updated: 3 July 2023)