PS19/24: Illiquid assets and open-ended funds and feedback to Consultation Paper CP18/27

Read PS19/24 (PDF)[2]

Why we are changing our rules

We are seeking to reduce the potential for harm to investors in funds that hold inherently illiquid assets, such as property, particularly under stressed market conditions.

Open-ended funds that invest in inherently illiquid assets can encounter difficulties if many investors simultaneously try to withdraw their money at short notice. This happened following the result of the UK referendum on EU membership in June 2016, when a number of property funds had to suspend dealing temporarily.

Our measures should:

• Help investors understand better any restrictions on access to their investments and the circumstances in which these restrictions will be placed on the funds.
• In the case of funds investing in immovables, reduce the potential for some investors to gain at the expense of others because units have been incorrectly priced, due to uncertainty about the value of assets held in the fund.
• Reduce the likelihood of a run, which could substantially reduce the value of investments for those left in the fund and possibly destabilise the market more widely.

Following the suspension of the LF Woodford Equity Income Fund, a UCITS fund, we have assessed whether there were any lessons that might be relevant to the issues covered in this Policy Statement. Further information on this can be found in the Policy Statement.

What we are changing

We are changing our Handbook in 3 broad areas:

• Suspension of dealing in units
• Improving the quality of liquidity risk management
• Increased disclosure

The measures are focused on non-UCITS retail schemes (NURSs), as these are a key type of fund which can invest in inherently illiquid assets, and in which retail investors can invest.

Who this applies to

Those with an interest in open-ended funds, in particular NURSs, that invest in inherently illiquid assets, such as property, should read this paper. This includes fund managers, depositaries, ancillary service providers, intermediaries and investors. The remedies also have implications for those communicating financial promotions of funds investing mainly in illiquid assets to retail clients.

Next steps

If your firm is affected you need to comply with the rules and guidance introduced in the PS by 30 September 2020.

Fund managers and depositaries may wish to consider whether it would be in customers’ interests to adopt some of the measures, such as increased disclosure and improved liquidity management, ahead of the coming into force date, where these do not conflict with the rules applicable until that date.