THE CHALLENGE

The Government is committed to increasing economic growth and boosting productivity - ambitions that are particularly important as it seeks to guide the UK economy to recovery following the impact of COVID-19. The alternative investment sector is ready to play a key role in supporting UK growth and innovation by providing funding to SMEs and mid-market firms to help them scale up their operations. Many of these firms have struggled to access credit via traditional banks and reforms to the regulation of the non-bank lending sector could unlock billions of pounds of funding. 

A thriving savings and pensions market is also important for UK growth by virtue of providing much-needed investment flows. However, the way that defined contribution (DC) pensions in the UK are currently invested, with heavy exposure to public equity markets, means that it can be difficult to invest in innovative projects and achieve the best possible returns on contributions.

SOLUTION 1:  
SUPPORT THE UK’S NON-BANK LENDING SECTOR

As vital providers of credit to high-growth UK SMEs and mid-market businesses, our members’ lending has a disproportionately positive impact on the economy. These businesses created over half a million new jobs, compared to 191,000 by smaller businesses, between 2018-2019. More than 60% of their lending is to the business and professional services, technology, media and telecommunications, or healthcare and life sciences sectors. Businesses in these sectors help drive productivity, innovation and growth in line with the Government’s broader agenda.

Supporting the development of new forms of financing and promoting the non-bank lending sector will boost the availability of capital to SMEs and mid-market companies as they recover from the impact of COVID-19. This will provide a new source of growth capital for companies that fall outside the risk appetite of traditional lenders despite being successful businesses. One impact of COVID-19 is that there is likely to be an increase in these types of borrowers, with losses from COVID-related lending likely to further reduce the capacity of the banking sector to provide credit. As well as being a source of new investment capital, UK private credit funds also provide borrowers with finance that is tailored to their business model, allowing UK businesses to compete in a global marketplace and support job creation and economic recovery.

AIMA and the ACC welcome the Chancellor’s intention to facilitate new sources of capital for UK businesses and establish a UK Long-Term Asset Fund (LTAF). This will encourage pension funds and investors to diversify and access illiquid investments, such as private credit and infrastructure, and support levelling up across the UK.  We are pleased to support the work of the Productive Finance Working Group in developing the LTAF to ensure that this is aligned with the needs of investors and supports greater investment in the UK economy. It is also necessary to provide credit managers with viable UK structuring options to support their investment strategies. A UK Asset Holding Company (AHC) regime suitable for credit investment strategies would enhance  the UK’s position as a leading hub for private credit managers and increase the UK’s competitiveness with other investment fund domiciles. We commend HM Treasury’s initiative to establish a UK AHC regime and its engagement with industry to date.

SOLUTION 2:  
REFORM PENSIONS RULES TO GRANT DC SCHEMES BETTER ACCESS TO ALTERNATIVE INVESTMENTS

Encouraging pension schemes to move towards alternative assets and strategies would better diversify their investments and improve returns, supporting better retirement income for UK savers. It would also mean better allocation of investment capital to the most productive and innovative businesses and opportunities across the UK.

THE CHALLENGE

The Government is committed to levelling up economic prosperity, which will require the creation of new, well-paid jobs across the UK. We believe that the fund management industry is well placed to be a source of new jobs outside of London and the South East of England, particularly if the UK can position itself as a ‘one-stop shop’ for professional investor fund management.

While many alternative investment managers are based in the UK, none of the professional investor funds that they manage are domiciled in the UK (outside of limited categories). This reflects the fact that the UK’s current funds regime is overly complex, unattractive for non-UK resident investors and not targeted towards strategies solely intended for sophisticated and professional investors, such as those run by alternative investment fund managers. As a result, funds are instead domiciled in specialist funds jurisdictions within and outside of the EU, predominantly Ireland and Luxembourg. This increases costs and means that associated jobs servicing those funds are created outside of the UK, when they could instead be created across the UK. 

At the same time, the UK’s existing financial services regulatory framework and EU-derived reporting requirements for funds managed in the UK are not suited to the specific needs of the UK market, given that they are based on compromises made at the EU level. This stands as an obstacle to investment managers seeking to expand and do business in the UK and means that financial supervisors must base their oversight on inadequate data due to poorly designed reporting requirements.

Finally, addressing complexity and uncertainty in the tax framework would successfully promote the UK as an open, international and competitive place to do business, demonstrating that, post-Brexit, the UK is open for business.

SOLUTION 3:
MODERNISE THE UK’S PROFESSIONAL INVESTOR FUNDS REGIME 

AIMA and the ACC welcome the Government’s call for input on reforming the UK’s investment funds regime. We believe that the UK should introduce a series of flexible, suitably regulated and tax-neutral professional investor fund vehicles that can be available in corporate, limited partnership or other forms and be open or closed-ended. This would encourage the creation of new funds – and associated jobs in sectors that service those funds – in the UK. 

SOLUTION 4:  
BUILD A BETTER-REGULATED FINANCIAL SERVICES INDUSTRY

A rethink of the scope and nature of rules for UK-managed funds would help ensure the market’s long-term success, by ensuring that regulators have the data that they need and industry participants are not over-burdened by poorly conceived regulatory requirements. Domestic reform that is proportionate, principles-based, improves the quality of data provided to regulators and considers alignment with the US, where effective, would create a transparent and competitive regulatory environment that encourages innovation and facilitates cooperation between supervisory authorities globally. The process to develop regulatory guidance should be swift, transparent and consultative, with opportunities for industry participants to raise questions of interpretation. In the Annex, we address: the broad regulatory framework; reporting rules; and specific deficiencies in existing rules. We believe that the UK can adapt its rules while still seeking equivalence at EU level by focusing on the consistency of the outcomes achieved through the respective regulatory regimes.

SOLUTION 5:  
MAINTAIN A TAX SYSTEM THAT MAKES THE UK AN ATTRACTIVE PLACE TO DO BUSINESS 

Removing elements of UK tax law that are unnecessary or burdensome while retaining those that contribute to a well-functioning tax system would ensure that the UK remains an attractive jurisdiction for investment managers to set up and expand, while also supporting investment that will be necessary for growth and innovation. In future, elements of the tax framework relevant to financial services should be considered in a more centralised, less siloed manner.

 For further information, please contact Adam Jacobs-Dean, Managing Director, Global Head of Markets, Governance and Innovation.