UNITED KINGDOM: AIC Responds to FCA Speech on Less Liquid Assets in Open-Ended Funds

Thursday March 26 2020

The Association of Investment Companies (AIC) issued its response to a speech given by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, to members of the Investment Association.

The speech highlighted joint work between the FCA and the Bank of England on the liquidity mismatches within open-ended funds that hold less liquid assets. It comes after the suspension of open-ended property funds this week over valuation uncertainties.

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said that they welcome this positive contribution to the debate over the problems of holding illiquid assets within open-ended funds that offer daily redemption. While previous suspensions of open-ended funds, including Woodford Equity Income, were due to the volume of redemption requests, the speech highlights that these latest suspensions were caused by uncertainty over the valuations of underlying properties. It is essential that any regulatory response addresses both these factors.

The AIC’s Solution: Reliable Redemption

The AIC believes that all open-ended funds should be required to offer reliable redemption to match the redemption terms of the fund (the promise made to investors as to when they can get their money back) to the liquidity of the underlying assets (the time taken to sell holdings without a fire sale). Notice periods would be a fundamental part of delivering reliable redemption.

Reliable redemption means:

• The basis on which an investor can leave the fund (in timescale, volume or price) should not change, irrespective of the level of redemptions;
• Redemption processes must not rely on assets being sold cheaply to raise cash to meet redemption requests;
• Redemption arrangements must operate in both normal and foreseeable stressed market conditions.

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