The FCA has finally revealed plans to prevent a repeat of the fallout that occurred when property funds gated.
More than two years after some open-ended property funds suspended dealing in the immediate aftermath of the European Union referendum vote back in 2016, the regulator has revealed fund houses must improve liquidity management in open-ended funds investing mainly in illiquid assets.
Today (8 October), in a 79-page consultation paper the FCA proposed requiring fund managers to produce contingency plans in case of a liquidity crisis and enhancing depositaries’ oversight of the liquidity management process.
The watchdog also clarified how it expect firms to use some liquidity management tools.
The FCA also proposed:
- Funds to suspend trading when the independent valuer expresses uncertainty about the value of 'immovables’, such as commercial property, that account for a significant part of the fund’s assets.
- Managers of funds investing mostly in inherently illiquid assets to produce contingency plans in case of a liquidity risk crystallising.
- Depositaries to oversee the liquidity management process in these funds.
- 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.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "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 will consider feedback to this consultation and will publish a policy statement with final rules and guidance next year.
The consultation remains open to responses until 31 January 2019.
At the time of the Property fund suspensions, the FCA indicated that it would be investigating further the circumstances that led to investors being unable to get their hands on their cash.
Many funds remained closed or 'gated' for several months to protect existing investors from a mass of redemptions.
Today's proposals come a year after the FCA published a discussion paper on the topic floating several ideas for possible reforms, including the separation of retail and 'professional' investor assets.
According to the watchdog this might have enabled authorised fund managers to continue to offer retail investors a high degree of liquidity (on the basis that the impact of suspension of dealings requests by retail investors is likely to be relatively low and easily managed) while imposing longer notice periods or less frequent dealings to institutional investors.
The paper also considered the merits of setting limits around a fund's portfolio structure.
It gave an example of limiting the proportion of the portfolio that could be held directly in illiquid assets or a minimum amount to be held in cash, near cash or uncorrelated securities.
The spectre of direct regulatory intervention was also raised in the discussion paper.
emma.hughes@ft.com
