FCA consults on new rules to reduce harm to investors holding illiquid assets

Written by Oliver Wade

The Financial Conduct Authority (FCA) is consulting on new governance in a bid to reduce the potential for harm to investors that hold illiquid assets, particularly under stressed market conditions, such as the UK referendum on EU membership in 2016.

After the referendum result was posted in 2016, several property funds were temporarily suspended as a significant number of investors simultaneously attempted to withdraw their money at short notice.

The authority highlighted that it was pleased suspensions and other liquidity management tools worked “as intended” and prevented wider market disruption, with dealing in the affected funds resuming before the end of 2016.

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.

The regulator 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; and more information to be disclosed about the liquidity risks in these funds.

Commenting on the proposals, FCA executive director of strategy and competition Christopher Woolard 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 authority announced that it will consider feedback to this consultation and publish a policy statement with its final rules and guidance next year, and will remain open to responses until 31 January 2019.

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