The Financial Conduct Authority’s long-awaited policy statement on funds investing in illiquid assets was delayed in the aftermath of Neil Woodford’s Equity Income fund suspension.
Given the increased scrutiny of liquidity that followed, some may have expected the regulator to crack down harder on open-ended portfolios. In reality, its final rules have eased off on the strictures planned for property funds.
The new demands do involve the creation of a new category of investment vehicle – funds investing in inherently illiquid assets – FIIAs such as property funds will be subject to greater monitoring from the regulator.
More notably, however, the FCA has backed away from clamping down on the amounts of cash such strategies hold.
And while the watchdog has proceeded with its plan for the likes of property funds to suspend dealing if there is uncertainty over the valuation of 20 per cent of their assets – as defined by an independent monitor – managers will be able to override this rule if they and the valuers agree that a suspension is not in investors’ best interests.
The regulator is also confident that the new 20 per cent rule will reduce the incentive for managers to hold large cash weightings. But the jury is out on whether fund companies will turn their back on this strategy.
As Financial Adviser reported in July, some funds are now holding around 20 per cent in cash, despite the FCA having floated these rules earlier this year.
The FCA is continuing to look at potential liquidity mismatches elsewhere in the fund universe, in conjunction with the Bank of England. But the impact on advisers may again be less severe than some fear.
Last week’s policy statement, for example, floated the idea of obliging a fund’s largest investors to move away from daily dealing. But that is a point aimed at institutional buyers rather than advisers.