UNITED KINGDOM: HM Treasury Review of the UK Funds Regime: New Fund Structures

Thursday January 28 2021

HM Treasury has published their “Review of the UK funds regime: a call for input” seeking comments from stakeholder regarding what reforms should be taken in order to improve the UK fund regime.

The consultation is wide-ranging, covering direct and indirect tax and relevant areas of funds regulation and includes chapters on:

• The UK’s approach to funds taxation;
• The UK’s approach to funds regulation; and
• Opportunities for wider reform.

This update we will focus on the Chapter 4 of the call for input and the “Opportunities for wider reform”. In particular, the “New Fund Structures” section of Chapter 4.

New Fund Structures

The government has received a number of proposals for new fund structures which seek to fill gaps identified in the range of UK fund vehicles, to address policy challenges faced by the industry and seize opportunities presented by growing areas of investor demand. The call for input aims to assist the government’s understanding of the opportunities presented by potential new fund structures, the design features which would make them a success, and the processes for their implementation.

Long-Term Asset Fund

The UK Funds Regime Working Group report set out recommendations to establish a Long-Term Asset Fund (LTAF). It is a proposal for a new authorised open-ended fund structure designed to enable investors, particularly DC pension schemes, to more confidently invest in illiquid assets (such as venture capital and infrastructure) than they can using existing fund structures.

The proposal has the potential to support several wider government priorities, particularly the work to address the financing gap that exists for innovative firms trying to scale up and to help drive the post-COVID economic recovery. Therefore, the government strongly supports the delivery of an LTAF and the Chancellor has set out his ambition to see the first one established in 2021.

The FCA plans to consult early in 2021 on setting up a framework for the LTAF, but to make it successful the wider ecosystem for funds will also need to change. For example, the distribution infrastructure will need to support dealing at different intervals as well as notice periods.

New Unauthorised Fund Vehicles

In addition to its authorised fund structures, the UK offers investment companies, as well as unauthorised vehicles in the legal forms of unit trusts and limited partnerships. When these unauthorised funds are of sufficient size, their managers require authorisation as AIFMs under the UK legislation which implemented AIFMD, but the funds themselves do not require authorisation by the FCA. Unauthorised funds offer greater investment freedom than authorised funds but are more limited in the types of investors they can be sold to, and, with the exception of investment companies, are not accessible to retail investors in general.

Stakeholders have suggested that there is a gap in the UK’s unauthorised fund range for new, flexible, tax-efficient unauthorised fund structures which would be used for products aimed only at professional investors and investing in alternative asset classes and investment strategies. It has been put to the government that these vehicles would have strong international appeal and could support the government’s work on facilitating investment in long-term and productive assets.

The government is considering a range of industry proposals for unauthorised fund structures as part of the call for input. Stakeholders have emphasised the value of unified branding across the UK structures for funds targeting only professional investors, in order to maximise awareness and take-up, and have suggested that this new professional vehicle should be able to take multiple legal forms. The UK Funds Regime Working Group Report and the Alternative Investment Management Association have proposed this could be structured as either a corporate or as a ’partnership’ (which we assume to mean limited partnership). The Association of Real Estate Funds, supported by the UK Funds Regime Working Group, has also suggested that it could be structured as a contractual scheme, which they suggest in particular could offer an onshore alternative to fund managers looking to service pension funds’ as well as other, professional investors’ investments in underlying UK real estate assets.

The proposals for all three structures suggest that they should be unconstrained in terms of eligible asset classes and investment strategies. The proposals for the unauthorised corporate and limited partnership structures suggest that they should have flexibility on whether they are open-ended or closed-ended, and on whether they are listed or unlisted. The proposal for the contractual structure is clear that it would only be closed-ended and would not be listed but would have tradable units.

The proposal for the contractual structure is clear that it should not be authorised. However, views from stakeholders received to date on the corporate and limited partnership structures are more mixed: some consider that these should be entirely unauthorised collective investment schemes, while others suggest that they should be subject to a new ’light-touch’ form of authorisation. It is unclear what purpose this ’light touch’ authorisation would serve as it would not be appropriate to label such products as being in some way FCA certified if the regulator had minimal involvement in the process.

Stakeholders have suggested that the new unauthorised corporate structure should be established outside of the existing regime for authorised corporate funds. The proposed new form of unauthorised limited partnership structure could use existing limited partnership legislation but stakeholders would prefer it to be established separately. It has been suggested that the unauthorised contractual vehicle should be created as a version of the existing Co-ownership Authorised Contractual Scheme.

Click here for our article on the list of questions contained in the Call for Input.

Click on the above link for further information.