The FCA’s new rules, which will come into effect on 30 September 2020, require that investors are provided with clear and prominent information on liquidity risks, and the circumstances in which access to their funds may be restricted. They place additional obligations on the managers of funds investing in inherently illiquid assets to maintain plans to manage liquidity risk.
The rules also aim to reduce the potential for some investors to gain at the expense of others, and reduce the likelihood of runs on funds leading to ‘fire sale’ of assets which disadvantage fund investors.
Christopher Woolard, Executive Director of Strategy & Competition at the FCA, explains:
“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.
“We also want to make it clear that authorised fund managers are responsible for managing the liquidity risk in their funds and acting in the best interests of investors.”
The new rules also include introducing a new category of ‘funds investing in inherently illiquid assets’ (FIIA), which include property funds. Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed, standard risk warnings in financial promotions, enhanced depositary oversight, and a requirement to produce liquidity risk contingency plans.
The FCA and the Bank of England are assessing how funds’ redemption terms might be better aligned with the liquidity of their assets in order to minimise financial stability risks, and provide appropriate protection to investors, without compromising the supply of productive finance.