Widening investor choice

Regulators continue to create new fund vehicles to offer more flexibility to fund management companies and investors, and to compete for market share. Authorities are also aiming to bolster private investment in illiquid assets to assist economic recovery. New vehicles and strategies are increasingly being made available to sophisticated and retail investors, enabling them to diversify their portfolios into wider asset classes. Regulators are keen, though, to mitigate potential conduct risks and prevent harm.

Amidst volatile markets, some regulators have been clarifying their expectations of fund managers regarding the inclusion of crypto-assets in portfolios. Many regulators remain cautious.

• New and enhanced products
• Allowing long-term and illiquid assets
• Crypto-assets and retail funds — yes or no?
• Shariah-compliant financing
• Overseas funds — in or out?
• Chinese markets open and tighten
• Competing domiciles

Since last year's report, regulators have continued to make new fund vehicles available and to revisit existing frameworks.

The new Australian Corporate Collective Investment Vehicle (CCIV) became effective from July 2022, offering fund managers a new corporate structure with the possibility of establishing sub-funds to cater to retail or professional clients. The CCIV is designed to increase the competitiveness of the Australian asset management industry and is expected to appeal to overseas investors who are more familiar with a corporate vehicle. Regulations were also passed to facilitate the development of "Innovative Retirement Income Stream Products". The regulations provide the guiderails that need to be met to qualify for certain tax and social security treatment. Such products are said to be gaining traction.

The Securities Commission Malaysia (SCM) liberalized its framework for unit trusts, enabling retail funds to invest in and offer a wider range of investment instruments and activities, potentially enabling management companies to develop more innovative products. And in Mainland China, the Securities Regulatory Commission (CSRC) published new rules, standardizing the framework for public pension investments and allowing Chinese investors to purchase pension funds that meet certain eligibility and size criteria.

Amendments to the rules for Polish-domiciled ETFs¹ are being considered as part of the implementation of the government's capital market development strategy. The intention is to enable Polish ETFs to be established as UCITS², which raises challenges around admitting units of open-ended funds to trading.

In Brazil, it is proposed to increase the level of permitted leverage for funds with retail and qualified investors. Additionally, the proposals would allow retail investors to invest in funds that can invest 100 percent of their assets in Brazilian Depositary Receipts (BDRs) where the underlying securities or ETFs are traded abroad, and in other assets with certain restrictions. Currently, retail investors can only invest in BDRs directly and not through fund structures. The proposals would also increase by 20 percent the amount that funds can invest in offshore assets, up to 40 percent of NAV³ for retail investors and 60 percent for qualified investors. In a similar move, the South African Pension Funds Act was amended to enable them to increase investment in private assets up to 15 percent of total assets.

The rules for Italian “reserved” alternative investment funds (AIFs), which were intended mainly for professional investors, have been updated. The minimum initial investment was lowered from EUR 500,000 to EUR 100,000, provided the investor has received financial advice and their holding does not exceed 10 percent of their total financial portfolio. There have also been revisions to the regulations that govern Italian Individual Savings Plans (“piani individiali di risparmio” — PIRs) and to their tax treatment. For ordinary PIRs, the annual investment limit has increased from EUR 30,000 to EUR 40,000, and the maximum total investment from EUR 150,000 to EUR 200,000. The rules for “alternative” PIRs have been aligned more closely with those for ordinary PIRs, to allow investment in more than one alternative PIR and to make some adjustments to tax arrangements.

Across jurisdictions there appears to be an increased appetite for mainstream asset managers to move into alternative assets.

The new Australian government has pledged to reduce barriers to superannuation investment in priority areas, including infrastructure, energy, manufacturing and housing to play a greater role in financing the real economy. In addition to the increase in the private assets limit mentioned above, proposed amendments to the South African Pension Funds Act encourage investments in infrastructure. As part of the changes, the definition of infrastructure was revised to align more closely with the UN principles for responsible investment. The existing limits on infrastructure investments were also reviewed, but the overall investment limit was kept at 45 percent of FUM⁴.

The new UK open-ended Long Term Asset Fund (LTAF) regime was launched in November 2021. LTAFs must be authorized, be at least 50 percent invested in illiquid assets, be valued at least once a month and have a minimum 90-day notice period for investor redemptions. Currently, LTAFs are available only to professional, sophisticated and high-net-worth investors, but the Financial Conduct Authority (FCA) is consulting on making these funds available to a broader subset of retail investors. In Switzerland, the planned Limited Qualified Investor Fund (L-QIF) regime is expected to be available for fund launches from April 2023. It will allow for the inclusion of various alternative assets for the first time.

The EU European Long-Term Investment Fund (ELTIF) regulation is under review. ELTIFs are closed-ended and can invest in long-term investments, such as social and transport infrastructure projects, and real estate. As of October 2021, only 57 ELTIFs had been launched, in only a handful of member states and with low FUM. Various rule changes have been proposed to broaden the scope of ELTIFs’ qualifying portfolio investments, allow more flexible investment rules, reduce “unjustified” barriers to entry for retail investors and to ease certain rules for professional-only ELTIFs. Members of the European Parliament are calling for the creation of a sub-category of ELTIFs to be marketed as environmentally sustainable (meeting stricter requirements and being aligned with the EU Taxonomy Regulation), and for the possibility of open-ended ELTIFs. In the meantime, individual countries are considering how best to optimize the regime, including consideration of national tax treatments.

As part of the review of the Alternative Investment Fund Managers Directive (AIFMD), there are discussions about EU rules for loan-originating funds. Such funds already exist in some member states, which are reviewing their national regimes, for example in Cyprus.

Sentiment towards crypto-assets has changed. The volatility of crypto-asset markets has increased, and some types of crypto-asset have experienced significant challenges – for example, the collapse of a prominent stablecoin⁵ in May 2022. Although some ETFs referencing virtual assets continue to be approved and listed, regulators across the world have published warnings for retail investors regarding the risks involved in crypto-assets.

In February 2022, the Financial Stability Board (FSB) assessed risks to financial stability from crypto-assets. It found that while hedge funds are allocating increasing amounts to crypto-assets, mainstream asset managers’ interest remains limited. However, IOSCO’s⁶ 2022 consultation report noted an “exponential increase” in retail interest in crypto-assets. Regulators are considering enhancing the emerging regulatory framework around the trading and settlement of crypto-assets to prevent fraud and enhance investor protection (see Chapter 3). This might increase managers’ and investors’ confidence in such assets.

Regulators are also considering asset managers’ involvement in crypto-assets, particularly regarding the ability for retail funds to invest in crypto-assets (or derivatives based on crypto-assets). There have been different approaches and responses to date. Most regulators remain cautious about allowing crypto-assets as eligible assets in retail funds, but some are allowing greater flexibility for funds promoted only to professional investors.

In September 2021, the Mainland Chinese authorities said they deemed cryptocurrency-related business to constitute illegal financial activities — a statement which impacted global crypto-asset prices. In Hong Kong (SAR), China, such business is not outlawed, but the regulator imposed additional investor protection measures on the distribution of crypto-asset products, including selling restrictions and a crypto-asset “knowledge test”.

In South Africa, the proposed amendments to the Pension Funds Act also included a new restriction on retirement funds investing in crypto-assets because of the high risks involved. The national treasury noted that this restriction would be consistent with an intergovernmental approach that does not permit collective investment schemes and pension funds to have exposure to crypto-assets.

In November 2021, the Luxembourg regulator (CSSF)7 noted that pension funds and UCITS for retail investors are not allowed to invest directly or indirectly in virtual assets, but that for funds for professional investors, investments in virtual assets “could be compatible” if this would not prevent compliance with existing rules. The CSSF also noted that managers of AIFs that invest in virtual assets must obtain prior authorization, provided guidance considerations regarding anti-money laundering and terrorist financing risks, and clarified that depositaries of such funds would need to comply with certain conditions. The Central Bank of Ireland (CBI) has permitted certain funds for professional investors to invest in listed cash-settled bitcoin futures. It also considered whether a UCITS can invest directly or indirectly in crypto-assets and concluded that it would be “highly unlikely” to approve such UCITS.

In December 2021, ESMA8 noted that the application of the EU AIFMD to fund managers investing in crypto-assets would need to be assessed on a case-by-case basis. ESMA reminded fund managers of the high risks involved in crypto-asset investments but stated that AIFs may in principle invest in any assets if the fund manager ensures compliance with AIFMD.

Regulators are also considering how funds can be made available to investors in a more streamlined way and reduce costs and inefficiencies. Increasingly, the industry is exploring solutions to “tokenize” funds using distributed ledger technology (DLT). The CSSF has clarified that service providers in Luxembourg may use DLT to maintain a fund’s unit/shareholder register. And in Germany, the finance ministry published a new law in 2021 (known as the “KryptoFav”) allowing for the possibility of issuing units of funds using DLT.