The FCA has published a consultation paper (CP) on illiquid assets and open-ended funds (CP18/27). Illiquid assets are those which are illiquid under normal market conditions, such as property or infrastructure investments. The FCA states that its proposals aim to reduce the risk of poor outcomes to retail investors in open‑ended funds, specifically non‑UCITS retail schemes (NURSs) that invest in illiquid assets.
The proposals in the CP require:
- a NURS that holds immovables to temporarily suspend dealing if the standing independent valuer expresses "material uncertainty" about the value of immovables that account for at least 20 per cent of the value of the scheme property;
- NURS managers to have contingency plans for dealing with liquidity crises;
- depositaries to exercise a specific duty to oversee the processes used to manage the liquidity of the fund; and
- a NURS that invests mainly in illiquid assets to disclose information about liquidity risks, the liquidity management tools available to the manager, the circumstances in which they may be used, and the potential impact on investors. This will include identifying the nature of the fund in its name, risk warnings in financial promotions to retail investors and details of the risk management strategy in the fund prospectus.
In addition, the FCA proposes guidance to clarify that managers of NURSs and UCITS should not hold large cash buffers for a long period for the purpose of dealing with the possibility of unanticipated high levels of investor redemption requests in the future.
Stakeholders should feedback to the FCA, including on whether these measures will have the desired effect of reducing the rush of investors seeking to redeem their investments during stressed market conditions. The consultation ends on 25 January 2019.
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.