Funds First Fall legal and regulatory update for real estate funds | Bryan Cave Leighton Paisner
During our recent Funds First webinar, we shared some technical and market issues and updates on a selection of key developments impacting real estate funds. Our discussion focused on the Long Term Asset Fund (LTAF), Qualified Asset Holding Company (QAHC) regime, various regulatory changes impacting the industry (including the new obligation framework due diligence rules proposed by the FCA and the new CBDF pre-market rules) and the proposed TCFD-based disclosure rules for UK asset managers contained in the draft new ESG manual. This briefing presents some of the highlights of the issues discussed, which we hope will also be of interest to those who were unable to attend the webinar itself.
Please do not hesitate to contact one of the members of the BCLP Funds & Investment Management team or your usual BCLP contact if you wish to discuss in more detail any of the questions raised in this briefing.
Long Term Asset Fund (LTAF) – new open-ended fund authorized by the FCA
- The LTAF is designed for investments that are inherently more complex and less liquid than those that have heretofore been deemed suitable for the retail market (and have typically been made available through closed fund structures aimed at professional investors). The LTAF is based on the Qualified Investor Scheme (QIS), but with enhanced protections for investors.
- FCA offers a principles-based approach to LTAF, giving managers (who will need to be full UK AIFMs) more flexibility, with wide latitude to access illiquid investments through collective investment vehicles as well as to manage liquidity . Initially open to QIS investors (professional clients and sophisticated investors) and DC pension plans, with the expectation that the LTAF distribution scheme will be extended to include a larger retail clientele in due course.
- While there is a strong emphasis on investor protection, including reporting and valuation requirements, the FCA rules on mandatory suspension of transactions where there is significant uncertainty about the valuation of transactions. ” at least 20% of the plan assets (this applied, among others, from September 2020 under FCA policy statement PS19 / 24 on illiquid assets and open-ended funds), not will apply, usefully, not to LTAFs.
- The LTAF has enjoyed broad industry support. However, concerns were raised about the limited initial target market; the fact that the distribution infrastructure is geared towards daily traded funds; and the overly onerous reporting requirements proposed. We’ll have to wait and see if the Chancellor’s pledge to launch the first LTAF in 2021 is fulfilled.
- Subject to comments from the consultation, FCA plans to issue a final policy statement and final manual rules later in 2021. To learn more, see our briefing FCA consults on a new category of authorized open-ended funds at UK to invest in illiquid assets: the Long Term Asset Fund (LTAF)
Qualifying Asset Holding Company Scheme (QAHC)
- The QAHC scheme is intended to compete with other fund holding schemes, in the hope of attracting more asset holding company structures to the UK and capitalizing on the strength of the UK sector in the investment management.
- A business must meet a number of conditions to be eligible for the QAHC scheme, for example, it must be a UK tax resident and at least 70% owned by ‘Class A’ investors. While a REIT is a ‘Category A’ investor, a QAHC cannot itself be a UK REIT or a member of a UK REIT group, which is disappointing given the importance of REIT in the UK. United as a property holding structure.
- A company that chooses the QAHC regime benefits from a number of changes to the UK corporate tax treatment of its investment in specified assets (including real estate abroad (but not in the UK)), which constitute its “QAHC closing activity”. The scheme aims to make the ownership of the relevant assets globally tax neutral, for example by providing limited exemptions from UK corporation tax and allowing the use of equity loans.
- From a real estate perspective, the fact that UK real estate is excluded from the QAHC regime is disappointing, but the ability to own real estate abroad is a positive development. The interaction between the REIT and QAHC regimes under the current bill could be improved and it is hoped that the ongoing consultation process between HMRC and the industry will succeed in harmonizing these regimes by April 2022, when the law QAHC must be promulgated.
- Read more in our briefing Promoting UK Funds – Can Qualified New Asset Holding Company Compete With Luxembourg? You may also be interested in our briefing The first phase of UK REIT reform confirmed
We have chosen several themes to illustrate the impact of regulatory changes on our sector. We would like to highlight a few things, as shown below.
- The new due diligence framework proposed by the FCA will include a new general principle requiring companies to act either in the best interest or to deliver good results to their retail customers. The FCA expects the rules to apply “to companies involved in the manufacture or supply of products and services to retail customers, even if they do not have a direct relationship with the end customer.” Businesses will therefore have to travel the distribution chain to determine if their products could ultimately be owned by retail customers – if so, they are likely to be caught up by the new regime, once implemented. See our briefing FCA offers a new Consumer Duty – TCF with bigger teeth?
- We await comments from the European Commission (expected later this year, as well as its review of ELTIFs) following its October 2020 consultation on a review of the AIFMD. The review covered a range of topics, under the broad headings of licensing / scope, investor protection, international relations, financial stability, private business investment, sustainability / ESG and miscellaneous. It would appear that the Commission is seeking to modify the AIFMD itself rather than just fine-tuning the Tier 2 measures (which was the approach advocated by the industry – the point being that significant changes at this stage would be unnecessary and could potentially create disruption, undue costs and inefficiencies). Expected target areas include delegation, liquidity management, custodian passports, assessments and marketing. UK AIFMs will not be directly affected by the changes, unless the UK implements equivalent changes (in due course and once draft amending legislation is produced by EU lawmakers) via the FCA manual and UK AIFM regulations. As the UK does not take an aligned approach, a UK manager could still be subject to EU rules, when trading cross-border using NPPRs, or acting as a delegate an EU27 manager, or to set a baseline compliance standard across its global group.
- As of August 2, 2021, the new “pre-marketing” rules of the EU cross-border distribution framework apply. Although the new provisions apply to AIFMs from the EU, reference is made to harmonized rules which do not disadvantage EU AIFMs compared to AIFMs from third countries. It seems that jurisdictions take different approaches in this regard – for example, Luxembourg and Germany have extended the rules to third country managers. Therefore, UK AIFs (as well as other non-EU AIFs) carrying out pre-marketing activities in Luxembourg or Germany would also have to comply with conditions similar to those imposed on EU AIFs who carry out pre-marketing operations in these countries. Check out our Spring Funds First update to learn more.
- HM Treasury is proposing changes to the regulatory framework for licensed firms approving financial promotions from unauthorized firms. The proposal does not affect the way authorized companies communicate their own financial promotions, approve their own promotions for communication by unauthorized persons or approve promotions of unauthorized persons within the same group of companies. The key impact is that authorized companies will only be able to approve financial promotions for unauthorized individuals when they have been required to not approve amended or canceled financial promotions. What is likely to have a greater impact on the sector is if the FCA or HM Treasury plan to conduct a broader review of the promotions regime, or if specific changes to products perceived to be higher risk. inadvertently impact the sale of funds to HNWI and other clearly informed investors who may not nevertheless meet the criteria for MiFID professional client status.
Sustainable finance legislation for UK fund managers
In the webinar, we discussed the proposed TCFD-based disclosure rules for UK asset managers contained in the draft new ESG manual (as set out in the FCA consultation CP21 / 17) as well as the how the Sustainable Finance Disclosure Regulation (SFDR) and EU taxonomy regulation is likely to impact UK asset managers operating in the EU. We will point out three issues from this discussion.
- While the FCA’s proposals are based on a similar approach to that of the SFDR (i.e. mandatory manager-level and product-level disclosures), they are separate and should be considered and applied in parallel. . For example, UK companies can return their climate-related financial disclosures, but only TCFD compliant reports, not SFDR disclosures (or other templates). Additionally, for discrepancies between the base metrics for TCFD and SFDR calculations at the product level, UK companies will need to report using both formulas.
- UK AIFMs of unauthorized and unlisted AIFs (as well as portfolio managers and investment advisers within the scope) do not have to make their TCFD product report public. Instead, they will need to make it available annually upon request from July 1, 2023/24 to a client who needs this information for their (or clients) own climate-related financial disclosure obligations.
- The FCA consultation should be seen in the context of various other UK-specific sustainability initiatives, in particular: the FCA Guiding Principles on ESG and Sustainable Investment Funds; FCA’s focus on investor stewardship and the proposal to implement integrated sustainability disclosure requirements.
- Read more in our Climate Disclosures for UK Asset Management Industry Briefing: FCA Consult on TCFD Compliant Measures
To view the recording of our Autumn Funds First webinar, please click here.