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More details on the European Anti Money Laundering Directive IV can be found here.
Flaws in the UK funds regime
A regular theme of our blogs has been the inadequacy of the UK’s onshore funds regime. The furore regarding the fund in which David Cameron had invested is illustrative of the problem. Many press commentators assumed that if it had been resident in the UK, that it would have been a normal corporation tax payer. This is not the case. As an open ended investment company, if established onshore in the UK, it would have needed to be an authorised fund. As such it would have been subject to tax at the basic rate of income tax of 20%. UK tax payers receiving dividends from the fund receive a credit for the tax suffered in the vehicle. For UK taxpayers, the total tax paid is the same. The reason for establishing the fund offshore is so that non UK investors do not pay UK tax on non UK investments. This seems eminently reasonable, and rather begs the question as to why it has taken so long to establish an onshore UK tax transparent fund. Tax Transparent Funds (TTFs) were introduced in 2013, so a securities fund would now be possible onshore. However, as those of you who follow our newsletters will be aware, from a real estate perspective there has been ongoing uncertainty regarding the treatment for Stamp Duty Land Tax (SDLT). This will finally be resolved when the current Finance Bill receives Royal Assent. You can find our comments on this here.
However, this only deals with part of the issue. The new TTF, as well as the existing Property Authorised Investment Funds (PAIFs) and the earlier Authorised Funds all sit within the same, flawed, regulatory regime.
All of these funds have to be open-ended either a Non UCITS Retail Scheme (NURS) or Qualified Investor Scheme (QIS).
A NURS is for retail investors. A QIS is more restricted in the individual investors to whom it can be marketed. For individuals, the key qualifying investors are individuals who are "high net worth” or "sophisticated" investors. Despite the overwhelming evidence to the contrary from the last crisis, the NURS and QIS regulations rely on liquidity as the underpinning source of protection for investors. John was the author of the PwC report for the Association of Real Estate Funds (AREF), “Unlisted funds, lessons from the crisis” published in January 2012 (you can find the report and supporting materials here). One of the key points from the report is that there is a trade-off between liquidity, volatility, performance and risk. There is an increasing recognition of the consequences of this, and many managers of open-ended funds have, with the support of investors, moved to place restrictions on absolute liquidity, by limiting the capacity for investors to redeem their units. This is starting to become a spur to product development. Unfortunately this is not reflected in the regulations, particularly for retail investors in a NURS. John was part of the unsuccessful attempt by AREF to lobby the FCA on this in February 2012. We also set out further thoughts on this when pension reforms were introduced in 2014 - “Budget 2014 - pension changes and real estate, it shouldn't be about buy-to-let”. You can find our comments along with the earlier lobbying letter here.
The QIS regime is less onerous, and the FCA are also amenable to granting waivers from some aspects of the liquidity requirements. Having rules that say one thing but applying them differently through the widespread granting of waivers is not ideal, and in any case does not address some of the provisions that institutional investors want. For a fund where all the investors are UK pension funds or charities, it is possible to establish an Exempt Unauthorised Unit Trust. The market has changed dramatically over the last twenty years and managers increasingly need to accommodate foreign investors and a more diverse range of UK investors.