The FCA is trying to make the best of any future fund suspensions with a package of measures aimed at reducing liquidity risk in open-ended funds.
The regulator has become concerned about open-ended funds that hold illiquid assets after a number of property funds were forced to cease trading in the wake of the Brexit referendum in June 2016, as many investors attempted to pull their assets at the same time and at short notice.
After an initial round of work into what happened, the FCA has concluded that “a major overhaul of the regulatory framework in this area was not needed”.
However, it has proposed four new measures to improve how suspensions and other liquidity management tools are used, how contingency plans are made, what oversight arrangements are in place and how retail clients are informed of any changes.
If the standing independent valuer – the body charged with valuing illiquid assets within the fund – expresses uncertainty about “immovable” assets such as commercial property worth more than 20 per cent of the fund, the FCA says the fund should be forced to suspend trading.
It also wants managers invested mainly in inherently illiquid assets to produce a contingency plan on what they would do if investors did decide to withdraw their money simultaneously.
Depositaries, who hold the assets in trust, should have a specific duty to oversee the processes used to manage the liquidity of the fund, the FCA says.
The regulator also wants “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.”
FCA executive director of strategy and competition Christopher Woolard says: “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 is consulting on the proposals until January next year.