Monday, 08 October 2018 12:06

FCA mulls new rules to halt chaos when illiquid funds are frozen

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FCA's Christopher Woolard FCA's Christopher Woolard


The Financial Conduct Authority is to consult on new rules to reduce the potential harm to investors holding funds invested in illiquid assets - such as property - “under stressed market conditions.”

The proposed changes follow a raft of property funds suspending new investments and withdrawals in 2016 as the property sector hit a wobbly patch following the Brexit vote.

The suspension of many property funds caused chaos for investors when they could not access their money. Most funds lifted the suspensions after a few months.

The FCA says: “Open-ended funds that invest in illiquid assets can encounter difficulties if significant numbers of investors simultaneously try to withdraw their money at short notice. An example of this occurred following the result of the UK referendum on EU membership in June 2016.

The FCA says it was pleased the suspensions were lifted after a while but improvements could be made to the whole process. These improvements would be in liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients.

Feedback to an FCA Discussion Paper and further supervisory work confirmed that a “major overhaul” of the regulatory framework in this area was not needed but “improvements…could be made.”

The FCA is consulting on a package 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 and what impact they may have on investors.

Christopher Woolard, executive director of Strategy & Competition at the FCA, 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 FCA will consider feedback and publish a Policy Statement with final rules and guidance next year. The consultation remains open to responses until 31 January.

Reaction to the proposals has been mixed.

Ryan Hughes, head of active portfolios at AJ Bell, said: “The proposals from the FCA will mean that property funds are likely to suspend trading sooner and potentially more frequently than they have in the past.

“The proposed new rules from the regulator suggest a fund should suspend when a valuer has uncertainty about the price of 20% of the fund’s assets. This means that when there is even a small amount of uncertainty in the market affecting the value of property and infrastructure, funds will be forced to suspend.”

However, he added this would not “necessarily (be) a bad thing” as it would make it fairer to all investors by reducing the ‘first mover advantage’, where investors quickest to cash in their investments were better off than other investors.

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