On 8 October 2018, the FCA published Consultation Paper 18/27: consultation on illiquid assets and open-ended funds and feedback to Discussion Paper 17/1 (CP18/27). CP18/27 will be relevant to those with an interest in open-ended investment funds that are likely to hold illiquid assets.
The proposals in CP18/27 are intended to reduce the risk of poor outcomes to retail investors in open-ended funds, specifically non-UCITS retail schemes (NURSs), that invest in illiquid assets. The proposals are also designed to ensure that investors are better informed about the liquidity risks inherent in these funds and the potential consequences for them, particularly under stressed market conditions.
Consequently, the FCA is consulting on a package of measures that will:
- reduce the risk that some investors may lose out because the units in a fund are wrongly priced. The FCA proposes to amend its Handbook by requiring NURSs holding property and other immovables to suspend dealing when there is ‘material uncertainty’ about the valuation of at least 20% of the scheme property;
- improve liquidity risk management. The FCA proposes to require managers of funds investing mainly in illiquid assets to produce contingency plans for dealing with liquidity risks. It also proposes to give depositories a specific duty to oversee the processes used to manage the liquidity of the fund;
- provide specific guidance to clarify the circumstances in which it may be appropriate to suspend dealing and also how a fund manager should arrive at a fair and reasonable value for an immovable, where it needs to be sold quickly to ensure that the fund can continue to meet redemption requests as they fall due;
- provide guidance to clarify that managers of NURSs and UCITS should not build up or hold large cash buffers for a long period, merely to deal with the possibility of unanticipated high levels of requests from investors wishing to redeem their units at some point in the future; and
- improve disclosure by requiring:
- managers of funds that invest mainly in illiquid assets to add an ‘identifier’ to the name of any relevant fund;
- disclosure in the fund prospectus the details of their liquidity risk management strategies; and
- a standard risk warning to be given in financial promotions relating to such funds to retail clients.
The deadline for responses to CP18/27 is 25 January 2019.
The FCA expects to publish a Policy Statement with final rules next year. It expects the changes to come into force in 2020.
Later this year the FCA plans to publish a paper exploring approaches and issues relating to patient capital (where investors make long-term investments, such as infrastructure projects, with longer term horizons for investment returns).