Consultative paper 21/12, in which the regulator proposes to set up funds of a new type, stems from its desire to promote investments in long-term, illiquid assets (including productive finance) to be a viable option for appropriate investors with long-term investment horizons who understand the risks.

Illiquid assets include venture capital, private equity, private debt, real estate and infrastructure. They can provide a useful alternative investment opportunity for wealthy consumers. The FCA is adamant that investment in illiquid assets is an important support for economic growth and the transition to a low carbon economy. Such investments can be more risky than diversified portfolios of listed equities or bonds but might lead to higher long-term returns in return for less or no immediate liquidity.

The FCA thinks that the management of LTAFs should be limited to "full-scope UK Alternative Investment Fund Managers" because these firms are subject not only to the requirements of both COLL and FUND (the parts of its rulebook that deal with collective investments and investment funds), but also to the other applicable provisions of the UK's version of the EU's Alternative Investment Fund Managers' Directive (AIFMD). A "full-scope AIFM" (according to FUND 1.3's list of types of fund manager) is an AIFM which: (a) is not small; or (b) is small but has exercised its option to obey all the rules that apply to a full-scope AIFM.

Open-ended funds, the regulator points out, ought to match the underlying liquidity of the assets in which they invest with the terms of redemption that they offer to investors. The FCA therefore expects long-term asset funds or LTAFs to be set up with notice periods and other ways of managing liquidity that take account of the liquidity of the underlying assets.

The FCA claims to have been "developing the LTAF," which it intends to be a non-daily dealing fund. It also wants to change its "permitted link" rules in COBS 21.3 to enable pension schemes to consider the proportion of illiquid assets throughout their investment portfolios, rather than to restrict the proportion of illiquid assets in each underlying fund in which they invest. It has already changed COBS 21.3 to tear down unjustified barriers to retail investors who invest in a broader range of long-term assets in unit-linked funds.