Financial Conduct Authority  

Covid-19 postpones FCA’s open-ended fund probe

Covid-19 postpones FCA’s open-ended fund probe

The City watchdog’s probe into open-ended funds has been put on hold due to the spreading coronavirus crisis.

The Bank of England, which was due to conduct the probe along with the FCA, said it had delayed its planned survey into around 300 funds until further notice, adding this would have a knock-on effect on the FCA consultation that would have followed.

The FCA and BoE were set to look into the liquidity mismatch between open-ended funds and the daily dealing such investment vehicles offered.

Issues surrounding illiquid holdings in open-ended funds were highlighted on several occasions in 2019, most notably by the Neil Woodford saga.

Mr Woodford was forced to suspend his flagship Equity Income fund after redemptions ran at £9m every working day in May. The level of illiquid holdings in the portfolio meant he was unable to meet the requests.

It has also been highlighted by M&G's decision to suspend its £2.5bn Property Portfolio fund in December for the second time in three years due to an “unusually high and sustained” period of outflows.

Meanwhile nine open-ended property funds have been suspended over the past few days, which has left £11bn of assets locked up - though this was because valuers could not value the assets due to the current market volatility, not because of liquidity issues.

Last year the FCA promised action "within weeks" and later issued a joint report with the Bank of England which floated proposals to curb the "mismatch" between redemption terms and funds' liquidity.

As part of a solution the regulators said investors pulling their cash should receive a price for their assets which reflected the discount needed to sell the required portion in the specified time period.

For example investors who asked for their assets within 24 hours would receive a lower price for their units compared with investors who gave a longer notice period.

According to the BoE and the FCA, swing pricing — which allows the price to be adjusted to reflect potential losses for other investors — was already used by some funds across other jurisdictions.

FCA research showed funds which used swing pricing did not experience significant outflows during periods of low liquidity or market stress.

Other policies suggested by the regulators included a shift in the way the liquidity of the funds were assessed.

One suggestion was to assess a fund’s liquidity based on either the price discount needed for a quick sale of a representative sample of the fund (including liquid and illiquid parts) or the time period needed for a sale to avoid a material price discount.

The FCA and the Bank said this could create “greater transparency” around fund liquidity and was a “necessary step” to ensure redemption terms were aligned with a fund’s actual liquidity.

The City watchdog was expected to provide an update on the development of new rules for open-ended funds later this year, but this has now been put on hold.