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AIC: LTAF concerns remain

– AIC warns questions persist about investor protection

– Concern that review of retail distribution will be undertaken before LTAF tested in difficult markets

The Association of Investment Companies (AIC) has responded to the FCA’s policy statement today, PS21/14 A new authorised fund regime for investing in long term assets.

Richard Stone(pictured), Chief Executive of the Association of Investment Companies (AIC), said: “Following publication of the FCA’s policy statement today, a number of our concerns remain. In particular, we fear the 90-day redemption notice periods will not prove sufficient, particularly in times of stressed markets. If too short, this could threaten the long-term resilience of the LTAF. It will be a challenge for managers to set adequate notice periods, especially if the structure also incorporates leverage. It is difficult to see how investors can be assured there won’t be a run on an LTAF’s liquidity when market sentiment turns negative.

“It’s good to see that wide retail distribution of LTAFs will not initially be possible. Indeed, the success of the policy as set out by the FCA hinges on the launch of products and DC pension schemes investing in them. The long-term stability of the product or wider retail engagement are not identified as success factors.

“I am concerned that the FCA is proposing a review to consider wider retail distribution as early as 2022. This is too soon. There won’t have been time for LTAFs to be tested through difficult markets. Pension schemes and other institutions can evaluate the downsides of the LTAF alongside its proposed benefits, but retail investors do not typically have the same resources or ability to assess those risks. There is a risk of investor harm if the product is not allowed to prove itself through the economic cycle.

“We are still waiting for the results of the FCA’s consultation on open-ended property funds even though it closed nearly a year ago. This shows how difficult it can be to address flaws once a product has been established. We need to be certain this won’t leave LTAF investors with similar long-term problems.

“Rules in the property sector require a fund to be suspended when there is material uncertainty over the valuation of its assets. These rules protected investors in property funds during the COVID crisis. LTAF investors, who could also have exposure to property, would benefit if the same rules were in place during inevitable future times of economic turmoil.

“Investment companies have been offering investors a tried and tested way to access long-term illiquid assets for many decades. They offer daily trading, a robust regulatory structure and independent boards of directors. Like all investments, investment companies were tested through the COVID crisis. Their resilience demonstrates the benefits of the investment company structure which we believe will continue to provide the best way for investors to avoid the risks of liquidity mismatches and suspensions.”

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