Broadening access to LTAFs is “an accident waiting to happen”

AIC response to FCA consultation paper ‘Broadening retail access to the long-term asset fund’.

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Today the Association of Investment Companies (AIC) responded to the FCA’s consultation paper ‘Broadening retail access to the long-term asset fund’ (CP22/14).

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “We believe selling Long-Term Asset Funds (LTAFs) to retail investors is an accident waiting to happen. As the experience of daily-traded property funds shows, the industry has a poor record of safely making illiquid assets available to consumers within open-ended funds. LTAFs are likely to repeat these failings, as minimum notice periods will not prevent liquidity mismatches which will be particularly harmful to retail investors.

“A year since the rules for LTAFs were introduced, no product has been launched. Widening LTAF distribution to retail investors before products have been launched and proven and before proper standards have been imposed is inviting trouble. Limiting purchases to 10% of an individual’s savings will not prevent serious losses if things go wrong. With a high risk of investor harm, no changes should be made to the distribution of the LTAF at this time.

“Providers should focus on developing LTAFs which appeal to informed investors, creating a strong foundation for the LTAF’s long-term success. Taking the time to get LTAFs right will benefit both providers and investors and maintain trust in the investment industry. Once products have been tested through different market conditions, with proven safeguards in place, widening retail distribution of LTAFs could be considered with greater confidence.”

The AIC’s response follows the IMF’s warning last week about the systemic risk posed by daily-dealing open-ended funds that invest in illiquid assets.

Two-tier LTAF regime proposed

Given the foreseeable risks to consumers, the AIC believes no changes should be made to the distribution of LTAFs at this time. The FCA should review this position after LTAFs have become established and have demonstrated how they operate in good and poor markets. Such a review would consider if LTAF operators have been able to set sufficient notice periods to prevent liquidity mismatches and how they have used liquidity management tools.

Before allowing LTAFs to be marketed to a wider retail market, the AIC proposes that the FCA should introduce a two-tier LTAF regime.

One tier of LTAFs would follow the current rulebook and would not be distributed to a wider retail market. The other tier of LTAFs would incorporate additional consumer protections to make them more suitable for wider retail distribution. Only when these measures have been introduced, and the FCA has reviewed market experience, should the LTAF be considered for distribution to a wider retail market.

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  1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for closed-ended investment companies to be considered by every investor. The AIC has 357 members and the industry has total assets of approximately £269 billion.
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