On 30 September 2019, the FCA published Policy Statement 19/24: Illiquid assets and open-ended funds and feedback to Consultation Paper 18/27 (PS19/24).

In October 2018, the FCA consulted on changes 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 (see previous blog here). In PS19/24, the FCA summarises the feedback it received to the consultation, its response to the feedback and sets out its final rules.

The FCA states that its final rules in PS19/24 reflects that it does not want to prohibit open-ended funds from investing in illiquid or less liquid assets where investors understand and are willing to accept the liquidity risk this can involve.

The FCA reports that following feedback to its consultation it will not proceed with two of its proposals:

• the requirement for a manager of a FIIA to add an ‘identifier’ to the name of the fund. However, fund managers are reminded that fund names should be carefully chosen so they do not mislead, as set out in COLL 6.9; and
• guidance relating to limiting the accumulation of large cash buffers within NURSs and UCITS funds.Under the new rules, where authorised fund managers managing NURSs choose not to manage the liquidity mismatch directly, for example by adapting the redemption arrangements to be more similar to the liquidity of the underlying assets, the fund will have to be classified as a FIIA and become subject to the additional requirements this brings.

Other than the above, the FCA states that the final rules do not significantly differ from the proposed rules included in its earlier consultation.

Under the new rules, where authorised fund managers managing NURSs choose not to manage the liquidity mismatch directly, for example by adapting the redemption arrangements to be more similar to the liquidity of the underlying assets, the fund will have to be classified as a FIIA and become subject to the additional requirements this brings.

In terms of the new rules, these are in summary:

• 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. However, an authorised fund manager will be allowed to continue to deal where they have agreed with the fund’s depositary that to do so is in the best interests of investors;
• managers of funds investing in illiquid assets to produce contingency plans for dealing with liquidity risks. Depositaries are also given a specific duty to oversee the processes used to manage the liquidity of the fund;
• further guidance is provided which is intended to clarify both the circumstances in which it may be appropriate to suspend dealing and the process for arriving at a fair and reasonable value for an immovable asset, where it needs to be sold quickly to ensure that the fund can continue to meet redemption requests as they fall due; and
• additional disclosure in a fund’s prospectus of the details of their liquidity risk management strategies plus a standard risk warning in financial promotions to retail clients for such funds (this applies to all firms communicating a financial promotion, not just the fund manager).

The new rules and guidance come into force on 30 September 2020. This will allow firms to use scheduled annual reviews of fund documentation to make the necessary changes.