On 7 August 2019, the FCA published a letter (dated 6 August 2019) from Andrew Bailey, FCA Chief Executive, in response to Lord Myners’ written question asking if the Government has ever formally reviewed the case for the UK establishing its own requirements for liquidity standards for UCITS at higher levels than specified in EU Directives or whether the UK is bound by EU rules and cannot introduce higher standards.
Mr Bailey explains that the UCITS Directive is generally minimum harmonising and therefore it would be possible to tighten the liquidity standards for UCITS schemes established in the UK. However, Mr Bailey also points to two significant drawbacks to this course of action:
- the FCA is not permitted by EU law to unilaterally extend measures to UCITS established in the EEA (as opposed to the UK) and marketed in the UK under EU passporting rights so tightening the liquidity standards for UK funds would not be sufficient in protecting UK investors from harm; and
- the UCITS Directive sets an overall objective that funds should be liquid, but the legislation contains detailed rules that may be, in some areas, not sufficient to ensure liquidity. Mr Bailey uses the example of the suspension of the LF Woodford Equity Income Fund to demonstrate that exchange listing and liquidity are not synonymous and that listing does not mean trading will occur. He adds that there is a potential conflict between the detailed rules and overall requirement for liquidity which may need clarifying.
Mr Bailey states that in his view there is merit in considering the new SEC approach in the US which creates a purposive test of liquid status and supports this with requirements around governance, systems and controls etc. The purposive test is to require fund managers to allocate assets to liquidity buckets based on the estimated time it would take to sell the asset.
Finally, Mr Bailey points out that the FCA will be working with the Bank of England to consider how redemption terms for funds established in the UK might be better aligned with the liquidity of their assets and the effectiveness of existing measures aimed at dealing with the misalignment of redemption terms and asset liquidity.