FCA consults on new rules to improve the approach to open-ended funds investing in illiquid assets

The FCA is consulting on new rules and guidance to reduce the potential for harm to investors in funds that hold illiquid assets, particularly under stressed market conditions. These measures will also support the FCA’s market integrity objective and help address financial stability concerns.

Open-ended funds that invest in illiquid assets can encounter difficulties if significant numbers of investors simultaneously try to withdraw their money at short notice. An example of this occurred following the result of the UK referendum on EU membership in June 2016.

On this occasion, it resulted in several property funds being temporarily suspended. The FCA was pleased that suspensions and other liquidity management tools generally worked as they were intended to and prevented wider market disruption. Dealing in the affected funds resumed before the end of the year. However, the FCA considered that improvements could be made in the use of certain liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients.

Feedback to a subsequent Discussion Paper and further supervisory work confirmed that a major overhaul of the regulatory framework in this area was not needed but there were improvements that could be made.

As a result, the FCA is consulting on a package of measures that will require:

  • 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.