Tuesday October 1 2019

News Source: Fund Regulation

Focus: Liquidity Risk Management

Type: General

Country: UK

On 30th September 2019, the FCA published Policy Statement 19/24 on illiquid assets and open-ended funds and feedback to Consultation Paper CP18/27. The Policy Statement summarises the feedback received to our consultation on illiquid assets and open-ended funds. It sets out our final rules relating to disclosure, liquidity management and suspension of dealing, as originally proposed in CP18/27.

The FCA 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.

The FCA 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.

The FCA are changing their 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.

Firms must 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.

Click on the link above for further information.