Minutes of the Productive Finance Working Group - 11 May 2021

Agenda

1. Competition law reminder by Simmons & Simmons LLP

2. Debrief on the Steering Committee (SC) meeting on 4 May and discussion

3. Agreeing next steps

Minutes

Item 1 – Competition law reminder by Simmons & Simmons LLP

1. Simmons & Simmons LLP set out the legal obligations of all members of the Working Group relating to competition law.^{footnote [1]} They reminded members that it is their responsibility to meet their legal obligations and to take their own legal advice.

Item 2 - Debrief on the Steering Committee (SC) meeting on 4 May and discussion

1. The co-chairs^{footnote [2]} of the Technical Expert Group (TEG) summarised the Steering Committee’s (SC) discussion at their meeting on 4 May, which focussed on the TEG’s progress to date and the questions the TEG asked the SC for steers on.^{footnote [3]}
2. The SC was grateful to TEG members for their work, and for the considerable progress they have made over a short period of time.
3. The SC broadly endorsed the TEG’s progress to date and proposed future workplan. There was broad consensus among SC members on the main issues and questions raised by the TEG. They also had some additional suggestions. The key points were:
   1. Target investor group for the LTAF: on balance, the SC agreed with the TEG’s proposed sequential approach to focus on DC schemes first. However, a number of members felt that it was important to produce a clear roadmap for considering investors beyond Defined Contribution (DC) schemes, and, in particular, retail investors. The Financial Conduct Authority (FCA) is considering some of these issues in its Long-Term Asset Fund (LTAF) consultation. The SC also noted the tensions that will need to be considered, including issues around consumer protection and the operational barriers associated with the distribution of non-daily dealing funds to retail investors.
   2. Key features of the LTAF blueprint: There was broad agreement with the LTAF blueprint set out by the TEG and with the proposal to prioritise liquidity as a key area of work in the next phase. In particular:
      1. The SC agreed with the TEG’s proposed approach to taking forward work on liquidity. Some SC members also called for a greater focus on specific standards, including minimum standards on aligning fund liquidity with that of its assets.
      2. There was interest to see more work on leverage undertaken.
      3. Some SC members were interested in the links between the TEG’s work and environmental, social and governance (ESG) considerations, and suggested that more attention should be given to exploring this topic in the next phase.
      4. One member noted that ‘productive finance’ is not a well-defined term, and that the group should agree what assets represent productive finance.
   3. Removing barriers to DC demand: The SC agreed that this is an important issue and suggested the Working Group should continue to engage with industry participants on the possible solutions. The SC also agreed that the work should focus on fiduciary duty, cost as a barrier, and engaging with Trustees to promote awareness of the issues and provide support to overcome them. One member suggested that pension schemes could be required to actively consider investing in less liquid assets, and where they do not, to set out the reasons why.
   4. Commitments and external engagement: To maximise the chances of the proposed solutions being implemented, the SC agreed that the Working Group should work towards commitments from both the private and public sector by July – that is, the actions the relevant stakeholders will need to take to implement the agreed solutions to the barriers to investing in less liquid assets. SC members were also keen to have a clear view on the criteria of success of this work overall, as well as through the entire chain of the key market participants, including funds, platforms, and investors. To facilitate that, the SC proposed that the TEG sets out several possible LTAF examples and tests them with a broad range of industry stakeholders, to assess potential barriers across the distribution chain and to formulate solutions to them.
4. The TEG discussed the SC’s feedback. The key points were:
5. Target investor group for the LTAF:
   • 1. It was clear that the TEG needs to set out a roadmap for retail investors and not just focus on DC schemes. The FCA’s LTAF consultation was welcome in this regard and it would be helpful if members provided individual responses as well as an overall Working Group view. Some members emphasised the importance of building in sufficient consumer protection into the roadmap for retail investors.
     2. Several members felt that although it was right to focus on DC schemes, as they face the greatest barriers, it was important that the Group’s communications were targeted at a broader range on investors, for example, Defined Benefit (DB) schemes, which may also wish to invest in the LTAF. This underscored the importance of designing flexible fud structures, where possible.
6. Key features of the LTAF blueprint: The TEG agreed to do more work on: specific standards, including minimum standards on aligning fund liquidity with that of its assets; leverage; links with ESG; and which assets represent productive finance.
7. Removing barriers to DC demand:
8. Based on the SC’s feedback, the TEG agreed to continue to develop solutions in the four areas it had identified: greater awareness; key considerations when making asset allocations; support in their execution; and support from regulators.
9. Some members noted that it was important to highlight the benefits to members of schemes in terms of overall value of investing in less liquid assets; and support schemes in overcoming the various barriers and provide reassurance in doing so. The SC’s proposed external engagement with DC schemes would be helpful in pinning down the concrete practical solutions here.
10. On the charge cap, one member felt that it had served its original purpose well, but was now a barrier to investing more in less liquid assets and achieving better overall value for members.
11. Commitments and external engagement:
12. The TEG welcomed the SC’s endorsement of working towards commitments from the private and public sector. Several members had questions about what commitments the Group should try to work towards and the best way of securing them. These required more thinking, but, ultimately, they should be tied to removing the underlying barriers.
13. There was broad support for the TEG setting out several possible LTAF examples and testing them with a broad range of industry stakeholders, to assess potential barriers across the distribution chain and to formulate solutions to them. This external engagement and working towards the final report would be key priorities in the next phase of the work.

Item 3 – Agreeing next steps

1. The co-chairs summarised the discussion and suggested that the relevant sub-groups take forward the respective actions outlined above. They also noted that the Secretariat would put together a draft outline of the final output of the Working Group for discussion at the next TEG meeting.
2. The Secretariat noted that the next TEG meetings are on 22 June and 16 July, respectively, and the final SC meeting is on 28 July.