The Financial Conduct Authority (FCA) has launched a consultation on new rules to protect investors in open-ended funds investing in illiquid assets, which it hopes will result in fewer runs on these vehicles at times of stress.
The consultation follows the fallout from the Brexit vote in June 2016, when hordes of investors scrambled to pull their money out of the £35bn open-ended UK commercial property sector in anticipation of a market crash and drop in property prices, resulting in several big-name property funds being temporarily suspended.
While the FCA said it was pleased that suspensions worked as they were intended to and prevented wider market disruption, with dealing in the affected funds resumed by the end of 2016, the regulatory body admitted improvements could be made "in the use of certain liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients".
Following feedback from a discussion paper launched in February 2017 and a review of property funds and liquidity risks, the FCA decided a major overhaul of the regulatory framework was not necessary but said improvements could be made.
The package of measures proposed by the FCA would require:
• Funds to suspend trading when the independent valuer expresses uncertainty about the value of 'immovables', such as commercial property, that account for a significant part of the fund's assets.
• Managers of funds investing mostly in illiquid assets to produce contingency plans in case of a liquidity risk crystallising.
• Depositaries to oversee the liquidity management process in these funds.
• More information to be disclosed about the liquidity risks in these funds, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors.
The FCA said the frequency of suspensions among funds investing in illiquid assets woud not be "used as a measure of sucess, as suspension may be in the interests of investors", but said there should be fewer runs on such funds as well as fewer complaints from retail investors about perceived unfair treatment when exiting these funds.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "As well as better protecting consumers, these changes should help to protect and enhance the integrity of the UK financial system.
"They will increase investors' understanding of, and confidence in, how funds holding illiquid assets are managed. We expect these changes to result in fewer runs on funds holding illiquid assets, and to reduce complaints from retail investors about perceived unfair treatment when they exit such funds."
The consultation will close on 31 January 2019. A policy statement with the FCA's final rules and guidance will be published next year.
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