The FCA has set out new rules to protect investors in open ended funds in hard-to-sell assets, but already they have run into some criticism.
The policy review had been started in response to property fund suspensions after the EU referendum.
The suspensions demonstrated the risk of liquidity mismatch between the time it takes to sell assets and fund holds, and the daily redemptions being offered to investors. Each time the fund managers were unable to fulfill requests for withdrawals because of their exposure to hard-to-sell illiquid assets.
The new rules started in September and only apply to property funds. A new category has been created: ‘funds investing in inherently illiquid assets’, which will be subject to enhanced oversight and disclosure rules. They will also be required to provide liquidity risk contingency plans and will be required to halt trading if there is uncertainty about the value of 20% or more of their portfolios.
The consultation closed in January and it had been due to announce its policy in June, but that was delayed by the Woodford suspension. As well as these new rules, the regulator is considering various remedies to avert a repetition of the Woodford crisis, such as the practice of daily dealing.
The policy statement says the FCA will look into notice periods for investors wishing to redeem their cash or reducing frequency for funds exposed to iliquid assets.
Another key area, according to the FCA, is disclosures. The Woodford crisis they say, illustrated the importance of investors being informed about the possibility of a liquidity mismatch. They further said, investors in the Woodford fund did not seem to be aware of – nor understand – the liquidity risks to which they were exposed.
Not going far enough?
The plans have not received the warmest of receptions. SCM Direct founder, Gina Miller, described them as ‘more tick-box regulation’, warning that investors would not be protected by mere risk warnings and contingency plans.
Other criticisms focused on the decision to limit the scope of the consultation to property funds while ignoring the wider UCITS Universe.
As the FCA acknowledged, the Woodford crisis showed that liquidity mismatches were not solely confined to property funds.
“Liquidity issues can extend to other open-ended funds, including UCITS, where they have holdings of less liquid assets, even including investments in listed equities if there is not a liquid market in those equities. Similarly, some bonds may be listed without there being a liquid market for those securities.”Financial conduct authority
UCITS fell outside the scope of the original consultation, but when the FCA delayed its policy by three months after the Woodford crisis to see if there were relevant lessons it could draw, there were expectations that the scope might be widened.
The issue is urgent. The major liquidity crises of the past year have involved daily dealing or UCITS funds, so while this policy statement is one part of the solution, more will need to follow. The FCA confirmed that both they and the Bank of England are continuing to investigate solutions which could be applied to the wider market, so there will be more updates to come.