The Financial Conduct Authority (FCA) is consulting on new rules and guidance to reduce the potential for harm to investors in funds that hold illiquid assets, particularly under stressed market conditions. These measures will also support the FCA’s market integrity objective and help address financial stability concerns.
Open-ended funds that invest in illiquid assets can encounter difficulties if significant numbers of investors simultaneously try to withdraw their money at short notice. An example of this occurred following the result of the UK referendum on EU membership in June 2016.
On this occasion, it resulted in several property funds being temporarily suspended. The FCA was pleased that suspensions and other liquidity management tools generally worked as they were intended to and prevented wider market disruption. Dealing in the affected funds resumed before the end of the year. However, the FCA considered that improvements could be made in the use of certain liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients.
Feedback to a subsequent Discussion Paper[1] and further supervisory work[2] confirmed that a major overhaul of the regulatory framework in this area was not needed but there were improvements that could be made.
As a result, the FCA is consulting on a package of measures that will require:
- Funds to suspend trading when the independent valuer expresses uncertainty about the value of ’immovables’, such as commercial property, that account for a significant part of the fund’s assets.
- Managers of funds investing mostly in inherently illiquid assets to produce contingency plans in case of a liquidity risk crystallising.
- Depositaries to oversee the liquidity management process in these funds.
- More information to be disclosed about the liquidity risks in these funds, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors.
In drafting these proposals, the FCA has considered the responses to its Discussion Paper, the results of its supervisory work and updated International Organisation of Securities Commissions Recommendations for Liquidity Risk Management for Collective Investment Schemes[3].
Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:
“As well as better protecting consumers, these changes should help to protect and enhance the integrity of the UK financial system. They will increase investors’ understanding of, and confidence in, how funds holding illiquid assets are managed. We expect these changes to result in fewer runs on funds holding illiquid assets, and to reduce complaints from retail investors about perceived unfair treatment when they exit such funds.”
The FCA will consider feedback to this consultation and will publish a Policy Statement with our final rules and guidance next year. The consultation remains open to responses until 31 January 2019.
Notes to editors
- Consultation Paper 18/27[4]
- Discussion Paper 17/1 on the regulatory approach to open-ended funds investing in illiquid assets[5].
- On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this, it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA[6].