Thank you for all the kind messages about our seventh anniversary as John Forbes Consulting LLP. On we go with year eight, with many of the same themes continuing. Our main piece of bedtime reading for you this time is a paper on designing real estate funds for DC pension investment plus our regular updates including some historical trivia regarding Birkenhead’s main tourist attraction.
Challenge of including illiquids in DC Pensions
John spoke on the Institute and Faculty of Actuaries webinar on this subject on 9th July. He has now written up his presentation as a brief paper, designing real estate funds for DC pension investment, which you can download here.
The general state of play
For the last few months, each time we send you a newsletter, we promise a blog when there is something tangible on a trade deal to analyse. The wait continues. Another round of formal discussions took place last week with further informal discussions over the last two days. Nothing happened. The EU once again said that the clock is ticking and the UK said that no deal is better than a bad deal. Overall, a bad deal still remains the likely outcome. Mark Francois MP, chairman of the eurosceptic ERG and a man who we regard broadly as an idiot, cited the deal hatched between Boris Johnson and Leo Varadkar in October 2019 that paved the way to the Withdrawal Agreement as the likely way that the broader Brexit deal would unfold. Very unusually, we agree with Mark Francois, at least on the overall conclusion if not the detail. The Mark Francois interpretation is that in the face of plucky British negotiating resolution Varadkar and the rest of the EU caved in and agreed to the removal of the Irish backstop. In reality, the UK accepted a border in the Irish Sea, the thing that the backstop was designed to prevent. Our expectation is for a repeat performance, with the UK accepting a dismally thin agreement accompanied by Mark Francois demanding the church bells ring out to mark Johnson’s glorious victory over the EU.
As ever, we continue the promise to produce a blog when white smoke emerges. In the meantime, since Boris Johnson and Leo Varadkar struck their border deal last year at the Thornton Hall Hotel here on the Wirral, our historical trivia at the end of this newsletter brings you an equivalent meeting at Birkenhead Priory in 1277.
Financial services Memoranda of Understanding
There is important and rather better news on the Memoranda of Understanding (MoUs)between the FCA and EU regulators. These cover a variety of areas of financial services and were entered into on 1st February 2019 to mitigate the effects of the UK crashing out of the EU without a withdrawal agreement being concluded. Obviously the Withdrawal Agreement did come into effect and therefore the MoUs did not. On 17th July, the FCA, the European Securities and Markets Authority (ESMA) and other EU regulators announced that the MoUs will now come into effect at the end of the transition period.
This is extremely significant. As we have previously covered in our newsletter, pretty much ad nauseam, at the end of the transition period the UK will lose access to the EU single market for financial services. A key element for UK real estate fund managers has been passporting rights for under the EU Alternative Investment Fund Managers Directive (AIFMD). In order to continue to benefit, many UK based fund managers have either set up AIFMs in the EU or entered into arrangements with EU third party AIFMs. A key element of this has been the AIFM delegating portfolio management back to the UK. One of the MoUs agreed in 2019, a multilateral MoU between EU/EEA securities regulators and the FCA covering supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, allows them to share information relating to market surveillance, investment services and asset management activities etc. This, in turn, will allow certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA. Two are of particular importance to UK real estate investment managers:
Although both the FCA and ESMA refer to this allowing firms’ post Brexit “contingency” plans to operate, it would seem to us to be more of an “inevitability” than a “contingency”. As we regularly point out, neither the Political Declaration to the Withdrawal Agreement, nor the current negotiations envisage anything more than basic equivalence for financial services. This does not provide for passporting under AIFMD or MiFID, thus requiring a move to “Plan B”.
European Union consultation on ESG reporting
We have been covering this in our newsletter since the consultation was published in April. It is a potentially major issue for the real estate investment management industry, directly for managers regulated under the EU AIFMD and indirectly as EU insurance companies and occupational pension schemes are also caught.
- delegation to UK firms under AIFMD
- outsourcing under MiFID
As we covered in our newsletter in May, on 23rd April, the three European Supervisory Authorities (ESAs), the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) issued a consultation on the proposed Regulatory Technical Standards (RTS) for ESG disclosure. The regulation to which the RTS relates, the Sustainable Finance Disclosure Regulation “SFDR” was published on 27th November 2019, and was briefly covered in our newsletter on 18th December 2019.
On 16th July, John chaired an Association of Real Estate Funds (AREF) webinar that looked at the key issues and how AREF would respond. You can find the recording and slides on the AREF website here.
John is holding the pen on the AREF response to the consultation, so If you wish to contribute, please contact John or AREF urgently. The deadline to submit the response to the consultation is 1st September.
Tax consultation on Asset Holding Companies
As covered in previous newsletters, John is drafting the Investment Property Forum response, which will focus particularly on the business case. Again, If you wish to contribute, please contact John urgently. The deadline to submit the response to the consultation is 20th August.
Association of Real Estate Funds CTI & Expense Ratio Working Group
The AREF CTI & Expense Ratio Working Group, which John chairs, has been providing input via the Technical Expert Panel to the Cost Transparency Initiative (CTI) which is an industry standard for institutional investment cost data. The CTI have now updated their website for the work that the working group has done on closed ended fund reporting. What was the CTI Private Equity Sub-template is now the Private Markets Sub-template which is a cost disclosure template to be completed by asset managers of closed-ended private equity, private debt and real estate (property) funds and so can be used for closed-ended real estate funds and real estate debt funds, which was the objective of the working group in asking for the change. The template now includes property level cost disclosures (the same as in the Main Account Template).
We have updated the CTI page on our website to reflect this. You can find it here.
Fund suspensions, liquidity contingency plans, liquidity tools and a new AREF template
As we have covered extensively in this newsletter, new rules for open-ended property funds for retail investors come into effect on 30th September, although as covered in our previous newsletter, an FCA consultation on further changes is expected before then. The rules apply to authorised funds in the form of non-UCITS retail schemes (NURSs) investing in inherently illiquid assets. The part that has attracted most attention is the requirement that funds must suspend dealing where the independent valuer determines there is material uncertainty regarding the value of more than 20% of the fund’s assets. Although the rules are not yet in place, existing rules require managers to consider the matter and many therefore took the view in March that they would suspend. The reverse consideration is now coming into focus as valuers look to lift uncertainty clauses.
The suspensions in March were a result of the valuation uncertainty rather than liquidity issues. However, the new rules that come into effect do deal with liquidity and require all NURSs investing in illiquid assets to have a liquidity management contingency plan. The provision under new COLL 6.6.3CR is:
The authorised fund manager of a FIIA must establish, implement and maintain an adequate liquidity management contingency plan for exceptional circumstances which sets out:
We would make the following additional points:
(1) how the authorised fund manager will respond to a liquidity risk crystallising;
(2) the range of liquidity tools and arrangements which it may deploy in such exceptional circumstances, any operational challenges associated with the use of such tools and the likely consequences for investors;
(3) the procedures for working with the depositary in the event the authorised fund manager must deploy these tools and arrangements;
(4) how the authorised fund manager will work with its delegates, such as third-party administrators, and other relevant third parties including intermediate unitholders, to:
(a) deploy the liquidity management tools and arrangements;
(b) communicate their use in a timely way to unitholders; and
(c) implement any other part of this contingency plan;
(5) any operational challenges likely to arise from working with relevant third parties identified at (4); and
(6) communication arrangements for internal and external concerned parties (including the FCA, investors and the media where necessary).
- The fund manager has to have confirmation from any third parties identified in the contingency plan that they will be able to perform the tasks. The impact therefore goes beyond the fund manager;
- Where there is more than one tier of liquidity to consider (for example a fund of funds), AREF has produced a template for reporting. You can find it, and some further background, here.
- Although the rules are specifically for NURSs, all funds with open-ended features need to have liquidity policies and plans.
Details of forthcoming webinars at which John is speaking are below.
London Stock Exchange Investment Fund Conference 2020
John will be speaking about real estate funds at this conference, which has been postponed until 4th September. It is now to be run online. You can find details and register here.
Investment Property Forum webinar on open ended property funds
John will be chairing the panel. Details and registration will be on the IPF website shortly.
As mentioned in our Brexit update above, Boris Johnson and Leo Varadkar struck their border deal last year at the Thornton Hall Hotel here on the Wirral. This is not the first border deal struck here. Situated next to the Cammell Laird shipyard, the oldest remaining building on the Wirral is Birkenhead Priory, established in about 1150. Like the shipyard, the priory is somewhat diminished these days. On 31st July 1277, Edward I arrived with a large retinue and stayed at the priory for several days. He was on his way home from a trip to North Wales to attack Prince Llywelyn ap Gruffudd, also known as “Llywelyn the Last” which may be a bit of a clue as to where this is going….
Whilst in Birkenhead, Edward received a large delegation on behalf of Alexander III of Scotland to negotiate a border dispute. This meeting is commemorated in a 1904 stained-glass window at Birkenhead Town Hall.
So what happened after that? Edward invaded Wales in 1282 capturing all the remaining principalities and rendering Llywelyn irreversibly “the last” on 11th December 1282. After that, Edward turned his attention to Scotland and as those who have watched the film Braveheart will appreciate, the border agreement of 1277 carried little weight. As a family footnote to this, in 1303, Edward massacred the Forbes Clan apart from the pregnant wife of Alexander Forbes who managed to escape, the unborn child ensuring that Alexander was not “Forbes the Last”.
For obvious reasons, we hope that the similarity between the EU and Edward I border agreement is only the choice of location for the meeting.