Funds must give investors “clear and prominent information” on their liquidity risks, the regulator has said.
The Financial Conduct Authority has confirmed new rules for non-Ucits open-ended investment funds (NURSs) which hold illiquid assets such as property. The FCA said funds will now be required to detail circumstances in which they could restrict investors’ access and will place additional obligations on managers to have plans in place to manage their funds' liquidity.
The rules come four months after the high-profile suspension of the Woodford Equity Income fund, which gated to investors when it was unable to meet redemption requests. The FCA wants to reduce the likelihood of there being a run on any funds or managers being forced into a fire sale of their assets which could disadvantage other investors.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “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.”
Peter Brunt, analyst at Morningstar, said: "This is a sensible move by the FCA, inparticular for daily-dealing open-ended funds. Educating investors on the potential risks involved is key with any investment, and this move is a step in the right direction for NURSs, where there may be a mismatch between the liquidty of underlying assets and the fund's dealing requirements."
Liquidity in the Spotlight
Illiquid assets have been in the spotlight since Woodford Equity Income suspended trading in June. The fund is not expected to open again until at least December. As a result, concerns have been raised about how appropriate it is for open-ended funds to hold assets such as property and unquoted companies, which can take weeks or even months to buy and sell. This creates a liquidity mismatch with the structure of open-ended funds, which allow investors to buy and sell units on a daily basis.
The FCA also pointed out the suspension of many property funds following the EU referendum in 2016 as an example of when stressed market conditions can cause issues for funds holding illiquid assets.
The regulator has mooted creating a new type of fund, a long-term asset fund, which might only allow investors access to their money at certain intervals – monthly or quarterly, for example – as one way of dealing with the issue.
The rules confirmed today will come into effect on September 30, 2020. They include introducing a new category of “fund investing in inherently illiquid assets” (FIIA). Funds within the category will have additional reporting requirements, including increased disclosure on how liquidity is managed and a requirement to produce liquidity risk contingency plans.
These funds will also be required to suspend dealing where an independent valuer determines there is material uncertainty of more than 20% regarding the value of the fund’s assets.
Ryan Hughes, head of active portfolios at AJ Bell, said funds could be forced to suspend trading more frequently under the new rules. This could particularly true of fund of funds or multi-asset funds, which indirectly invest in property through other funds.
The regulator added: “While the new rules announced today are focused on NURSs rather Ucits, the suspension of the Woodford Equity Income fund underlines the importance of effective liquidity management in open-ended funds more generally.”
Institutional Investors
Another concern which has been raised is the issue of having retail investors and large institutional investors holding money in the same fund. Woodford Equity Income, for example, suspending trading after Kent County Council tried to withdraw more than £200 million from the fund in one trade - a move which has caused months of pain for retail investors with far less cash.
Hughes said: "The FCA will look at whether different redemption condsiderations should apply to those institutional investors to help protect retail investors. We welcome the decision to look further into these solutions and would urge the regulator to move rapidly to make change as these are real problems that investors are facing today."
Woolard said: “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.”
