IA UK FUNDS REGIME WORKING GROUP Final report to HM Treasury Asset Management Taskforce 6 June 2019 ADDENDUM on Onshore Professional Fund proposals – 11 March 2020 1 TABLE OF CONTENTS FOREWORD FROM THE IA CEO ............................................................................... 4 CHAIRMAN’S FOREWORD ....................................................................................... 5 GROUP MEMBERSHIP / ACKNOWLEDGEMENTS ..................................................... 6 EXECUTIVE SUMMARY ............................................................................................ 8 INTRODUCTION .................................................................................................... 15 Background ............................................................................................................... 15 Purpose of group and report ....................................................................................... 16 Wider context ............................................................................................................ 16 Guiding pillars for moving forward ............................................................................... 17 1. OPPORTUNITIES FOR INNOVATION ................................................................. 18 How the UK fund regime can support innovation .......................................................... 19 Long-Term Asset Fund ................................................................................................ 21 Onshore Professional Fund ......................................................................................... 27 2. OPTIMISING THE EXISTING REGIME .............................................................. 31 Resolving tax inefficiencies ......................................................................................... 32 Coherence of regulatory framework - Creating a single rule book .................................. 36 UCITS plus ................................................................................................................ 37 Master feeders ........................................................................................................... 38 Operational efficiency ................................................................................................. 39 Retirement fund market .............................................................................................. 41 3. SUPPORTING COMPETITIVE DELIVERY ............................................................ 45 Promotion and branding ............................................................................................. 45 Investment Fund Forum ............................................................................................. 46 NEXT STEPS ........................................................................................................... 47 ANNEX 1: LONG-TERM ASSET FUND SUB-GROUP REPORT .................................. 49 Chair’s Foreword ........................................................................................................ 49 Introduction ............................................................................................................... 50 UK Investment Funds and Private Markets ................................................................... 50 Proposal for a UK Long-Term Asset Fund ..................................................................... 54 Target/Eligible Investor type ....................................................................................... 62 Table of Recommendations ......................................................................................... 64 Appendix 1: FAQs on Existing Fund Structures ............................................................. 67 ANNEX 2: ONSHORE ALTERNATIVES / PROFESSIONAL REGIME SUB-GROUP REPORT ................................................................................................................. 71 Chair’s Foreword ........................................................................................................ 71 Introduction ............................................................................................................... 72 UK Investment Funds and Professional Investors ......................................................... 72 Proposals for a UK Onshore Alternative Fund ............................................................... 73 2 Current UK Position .................................................................................................... 74 Competitor Fund Domiciles ......................................................................................... 76 Enhancement of Existing UK Fund Regime ................................................................... 76 Tax Regime ................................................................................................................ 80 Conclusion and Recommendations .............................................................................. 81 Appendix 1: Comparison of UK and Offshore Fund Structures – Authorised Funds .......... 82 Appendix 2: Comparison of UK and Offshore Fund Structures – Unauthorised Funds ...... 93 ANNEX 3: RETIREMENT FUND SUB-GROUP REPORT .......................................... 107 Chair’s Foreword ...................................................................................................... 107 Introduction ............................................................................................................. 108 UK Investment Funds and the Retirement Market ....................................................... 108 Investment Strategies used for Retirement ................................................................ 109 Enhancement of Existing UK Regime ......................................................................... 111 Conclusions and Recommendations ........................................................................... 118 Appendix 1: Benefits of using Life Insurance Vehicles for DC Provision ........................ 121 Appendix 2: Reinsurance Risk in DC Provision ............................................................ 122 ANNEX 4: DIRECT2FUNDS MODEL TECHNICAL ANALYSIS ................................. 123 Regulatory Implications ............................................................................................ 124 ANNEX 5: RESOLVING TAX INEFFICIENCIES AND REDUCING COMPLEXITY .... 128 Review Of UK Funds Tax Regime ............................................................................... 128 Value Added Tax (VAT) ............................................................................................. 133 Withholding Taxes and access to Tax Treaties ............................................................ 135 GLOSSARY ........................................................................................................... 137 ADDENDUM - 11 March 2020 .............................................................................. 140 3 FOREWORD FROM THE IA CEO The UK is one of the most vibrant asset management centres in the world, serving many millions of domestic and international customers. This benefits people and businesses across the country, supporting 100,000 jobs in the sector and contributing £4.5bn in tax every year. As part of Investment Management Strategy II (IMS II), Government, industry and regulators have been considering how to strengthen our competitive position further. A key aim is to ensure that the UK industry can continue to provide a world class product set to its customers, while also contributing sustainably to economic growth. At the heart of IMS II is the Asset Management Taskforce, chaired by the City Minister, which has been considering a wide range of highly relevant issues for the industry and society, including diversity, skills, sustainability, stewardship and technological change. Getting these ‘big picture’ issues right will be critical to the long-term success of the industry. In particular, the Taskforce has focused on the shape of the UK fund regime, a critical piece of the jigsaw of ensuring that the UK’s investment industry can continue to flourish in a rapidly changing world. Last year, the Asset Management Taskforce asked the Investment Association to establish a group to look at how to ensure that the UK fund regulatory and tax regime can develop and grow in the context of changing customer needs, changing capital markets and, of course, Brexit. Under the excellent chairmanship of Maarten Slendebroek and with expert input from across the industry, the UK Funds Regime Working Group has prepared its final report. Its conclusions are important and contain significant proposals to ensure the UK industry can deliver in a rapidly changing landscape. I would highlight in particular the importance of the Long-Term Asset Fund (LTAF) proposal in broadening access to private assets including Patient Capital. It is a reminder of our core purpose as an industry of investing effectively for customers over the long term, adapting to changing needs and helping to drive growth and innovation in the wider economy. Since the Report was drafted and submitted to HM Treasury in June, the debate has clearly moved further with a renewed focus on the role of illiquid assets in fund portfolios and on industry standards of governance and transparency. Our paper, 2025 Vision, sets out a wide-ranging set of actions for industry, in partnership