The Financial Conduct Authority (FCA) is consulting on a series of measures aimed at limiting damage to those who invest in illiquid funds “under stressed market conditions”.
The move comes after the EU Referendum in 2016 triggered a panic-driven surge in redemptions that left several funds with depleted cash levels, while several property funds were temporarily suspended.
Now, two years after the Brexit vote, the FCA has published a paper on proposals to avoid a repeat of panicked investors trying to withdraw cash from illiquid funds.
“As well as better protecting consumers, these changes should help to protect and enhance the integrity of the UK financial system,” said Christopher Woolard, executive director of strategy & competition at the FCA.
“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.”
John Forbes, the former PwC partner who was charged with writing an independent report following the crisis that saw six major funds with £16.6bn in assets suspend trading, said: “It is to be welcomed that the FCA is moving forward with this, and that their broad conclusions are in line with my April 2017 report.
“I think that it is also good news that this is a consultation that runs until January so the industry can respond to the detail of the proposals. My main disappointment is that the opportunity to make changes to facilitate the development of new, less liquid funds has not been taken.”
The consultation includes new rules 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.
The consultation remains open to responses until 31 January 2019.
To send feedback, e-mail anna.ward@egi.co.uk or tweet @annaroxelana or @estatesgazette
