The FCA has published Discussion Paper 17/1: Illiquid assets and open-ended investment funds (DP17/1). DP17/1 will be of interest to those who are involved with open-ended investment funds that are able to hold inherently illiquid assets including the operators and investment managers of these funds.

In DP17/1 the FCA considers some of the risks created when consumers use open-ended investment funds to gain exposure to assets that may be difficult for a fund manager to buy, sell or value quickly. The FCA refers to such assets in DP17/1 as ‘illiquid assets’, and these may include land and buildings, infrastructure, and financial assets such as unlisted securities.

The FCA believes that this is a good time to review its regulatory approach to open-ended funds that invest in illiquid assets particularly in light of the result of the referendum on the UK’s membership of the EU, when several fund managers of open-ended property funds suspended dealing in their fund or applied adjustments to asset valuations.

DP17/1 is not a general review of fund liquidity measures and it does not try to define which asset classes should be considered inherently illiquid. Rather, the FCA is seeking to gather more evidence to decide whether more (or different) rules and guidance are needed to support market stability and protect consumers, without preventing them from having access to a diversified range of investment opportunities.

In DP17/1 the FCA:

  • describes the liquidity management issues that some UK property funds experienced last year and explains how the regulator responded to them;
  • describes how current UK regulations apply to funds investing in illiquid assets and offer their managers a variety of tools to manage the fund’s liquidity in line with investors’ expectations; and
  • suggests some possible approaches to developing the regulation of liquidity, to support fund managers in meeting their obligations and ensure good outcomes for investors.

The deadline for comments on DP17/1 is 8 May 2017.

View FCA Discussion Paper on illiquid assets and open-ended investment funds, 8 February 2017