The Financial Conduct Authority (FCA) published a letter to the Chairs of authorised fund managers on 4 November. This asked fund managers to re-look at good fund governance particularly in relation to fund liquidity.

The FCA’s previous policy statement on illiquid assets focused on NURS and comes into force in September 2020. However, the FCA has reiterated that its focus on liquidity issues is a core function relevant to all open-ended funds, and fund managers should consider whether they should adopt some measures (such as improved liquidity management) ahead of September 2020.

The FCA letter re-emphasises the need for fund managers to take a step back and consider the appropriateness of the investments they make, in the context of the Collective Investment Schemes (COLL) rules. This may include, for example:

  • considering whether a security is, in practice, sufficiently liquid (even where it is admitted to trading on an eligible market);
  • re-evaluating valuation practices to ensure sufficient expertise and independence;
  • ensuring subscriptions and redemption arrangements are appropriate in the context of the relevant fund’s investment strategy;
  • assessing the liquidity of portfolio positions and liquidity demands; and
  • stress testing to assess the impact of extreme but plausible scenarios on the funds.

Combining these features with a formal policy of liquidity thresholds, and triggers prompting escalation or action, reflects good practice. The FCA has noted in particular that there are clear benefits to setting liquidity triggers for considering fund suspension.

The key output from the FCA letter is that fund managers need to review their practices for liquidity management to ensure that they can meet their obligations to investors and have adequate liquidity in the funds in order to meet investors’ redemption requests.

There is perhaps a broader question that comes out of this letter – are daily dealing funds really the right funds to be holding illiquid assets? Perhaps a new Long Term Asset Fund as proposed by the Investment Association earlier this year would be a more appropriate vehicle to hold illiquid assets…

Watch this space!