The Financial Conduct Authority has introduced new rules on certain open-ended funds, placing additional obligations on fund managers to maintain plans to manage liquidity risk and introducing a new fund category.
The rules announced today (September 30) apply to open ended-funds which invest in inherently illiquid assets, such as property, known as non-UCITS retail schemes (Nurs).
Almost all UK open-ended property funds come under this category.
From September 30 next year, when the rules come into effect, such funds will be required to provide investors with “clear and prominent” information on liquidity risks and the circumstances in which access to their funds may be restricted.
The rules also place additional obligations on the managers of Nurs to maintain plans to manage liquidity risk.
According to the City watchdog, the new rules aim to reduce the potential for some investors to gain at the expense of others and reduce the likelihood of a large number of investors pulling their money from the fund at once, leading to ‘fire sale’ of assets.
The rules also include a new category of funds — entitled ‘funds investing in inherently illiquid assets (FIIA)’ — which will be subject to additional requirements, such as disclosure of how liquidity is managed, standard risk warnings in financial promotions and liquidity risk contingent plans.
On top of this, the new rules mean Nurs which invest in inherently illiquid assets must also suspend dealing if an independent valuer decides there is ‘material uncertainty’ about the value of more than 20 per cent of the properties or assets within the funds.
The issue of liquidity came to light initially in the aftermath of the EU referendum in 2016, when a number of open-ended property funds had to suspend trading for a period of time due to a high number of investors seeking to redeem their holdings.
Similarly, although the Woodford Equity Income fund is not a Nurs but a Ucits fund, the debacle once again highlighted how illiquid investments can cause problems for the dealings of funds.
Embattled fund manager Neil Woodford was forced to suspend his Equity Income fund on June 3 after investors pulled around £9m per working day from the fund in May.
The ratio of illiquid and unquoted holdings within the fund prior to its suspension has come under scrutiny as it emerged the fund had broken its 10 per cent permissible threshold twice prior to its suspension.
Mr Woodford is now battling to sell shares to preempt a wave of redemptions when the fund opens, expected to happen at the start of December.
Christopher Woolard, executive director of strategy & competition at the FCA, said: “We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected.
“The new rules and guidance are designed to protect the interests of investors particularly during stressed market conditions. This includes those wishing to redeem their holdings, as well as those wishing to remain invested in the fund.”
Mr Woolard stressed the FCA wanted to make it clear authorised fund managers were responsible for managing the liquidity risk in their funds and acting in the best interests of investors.
Ryan Hughes, head of active portfolios at investment platform AJ Bell, said: “As expected, the FCA delayed the release of this paper after the suspension of the Woodford fund in order to consider the wider implications of illiquid assets in open-ended funds.
“The regulator states the Woodford saga highlighted that many investors aren’t aware of the liquidity risk they are exposed to and is looking at whether fund managers need to do more, including reviewing the appropriateness of daily dealing.”
Mr Hughes said AJ Bell welcomed the FCA’s decision to look further into these solutions but urged the regulator to move more rapidly to make changes as they were “real problems” that investors were “facing today”.
He thought the rules meant the industry was likely to see funds suspend dealing more frequently and sooner than they would have done in the past.
imogen.tew@ft.com
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