The Financial Conduct Authority has hit out at asset managers over their ‘lack of coherence’ in managing the potential risks to investors from large-scale redemptions.
The regulator said that a recent review showed there was a wide disparity in how asset management firms comply with regulatory standards and their liquidity management expertise.
“Asset managers need to manage liquidity effectively,” the FCA said.
“Doing so is vital so investors are able to withdraw their investment in line with their expectations and at an accurate price that reflects its value.”
Most asset managers had the potential to manage liquidity well with some adjustments, the FCA said, while a minority of firms had ‘inadequate’ frameworks to manage liquidity risk effectively.
The warning comes amid wider concern over the impact of market turbulence and economic uncertainty, with global regulators highlighting the risks to retail investors.
Yesterday (June 6), two global regulators released a number of recommendations around redemptions from open-ended property funds after waves of withdrawals prompted a number of funds gating.
The proposals included investors being hit with redemption fees, or swing pricing.
The FCA’s review did not include property funds.
The review comes weeks after the FCA agreed a £235mn payout from the authorised corporate director of the Woodford Equity Income Fund, which collapsed after outflows hit £9mn per day in 2019.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors.
"This review should serve as a warning to all asset managers that they need to get this right...they risk regulatory intervention if they don’t take this opportunity to address weaknesses.”
The FCA said, in light of the incoming consumer duty, asset managers should take account of the findings and review their company’s liquidity management arrangements.
The review found that while the tools for effective liquidity management were ‘usually’ in place at firms, they ‘lacked coherence’ when viewed as a full process and were not always embedded into daily activities.
The FCA also found that many firms attached insufficient weight to liquidity risk management in their governance oversight arrangements, with some methodologies also insufficient to assess the actual liquidity of portfolios.
While firms typically had governance and organisational arrangements in place to meet large one-off redemptions, they did not have sufficient arrangements to manage cumulative or market-wide redemptions.
Laith Khalaf, head of investment analysis at AJ Bell, said: "Managing the liquidity of the underlying portfolio is crucial for open-ended funds, because they can face large withdrawals at the drop of a hat, and need to sell assets in an orderly fashion in order to meet redemptions.
"While the FCA acknowledges that some firms have achieved high standards in this regard, it broadly thinks there is plenty of scope for improvement, particularly within a minority of asset managers with serious weaknesses in their approach."
He added: “It’s worth noting that at the same time the FCA is telling asset managers to manage liquidity risk, the regulator is also in the process of opening up long term asset funds investing in highly illiquid assets to retail investors. The initial impetus for long term asset funds came from none other than Rishi Sunak, in his former role as chancellor.
"The not-so-subtle goal is to tap up the large amount of money sat in pension funds for investment in UK infrastructure and start-ups, to help boost economic growth and fund the transition to greener energy. The government is also reportedly considering requiring pension funds to invest a certain proportion of their money in the UK, including into some illiquid assets.
"We will perhaps find out more when Jeremy Hunt gives his Mansion House speech next week. The government does seem to be focused on getting that pension money flowing into UK start-ups and infrastructure, despite the illiquid nature of these assets."
sally.hickey@ft.com
