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FCA creates tougher liquidity management rules

Compliance, regulationThe Financial Conduct Authority (FCA) is placing greater due diligence requirements on asset managers that invest in illiquid assets regulated under the UK’s ‘Nurs’ regime.

New rules for open-ended funds governed by Nurs – the Non-Ucits Retail Scheme - include giving more information on liquidity management for illiquid investments and greater oversight of depositaries.

The requirements – which come into effect on September 30 next year – follow the suspension of dealing in the flagship equity income fund of Neil Woodford which held a number of illiquid investments in its portfolio.

Christopher Woolard, executive director of strategy & competition at the FCA, said: “We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected.

“We also want to make it clear that authorised fund managers are responsible for managing the liquidity risk in their funds and acting in the best interests of investors.”

The FCA hopes the rules will reduce the likelihood of mass redemptions from funds that may lead to fire sales of assets, disadvantaging some fund investors.

According to the rules, investors must be provided with “clear and prominent” information on liquidity risks, and the circumstances in which they may be restricted from accessing their funds.

Funds will be required to provide standard risk warnings in financial promotions and liquidity risk contingency plans.

“While the new rules announced today [Monday] are focused on Nurs rather than Ucits, the suspension of the [Woodford Equity Income Fund] underlines the importance of effective liquidity management in open-ended funds more generally,” the FCA said.

The FCA and Bank of England are currently assessing how funds’ redemption terms can be better aligned with the liquidity of their assets in order to minimise financial stability risks, as well as offer investors better protection without compromising the supply of finance.

The Investment Association (IA) welcomed the rules and said it would continue to work with regulators to ensure appropriate liquidity management processes were in place.

“Fund suspension is not undertaken lightly and acts as an important and sometimes necessary tool to protect investors’ interests,” said IA chief executive Chris Cummings.

“The new rules, which combine enhanced liquidity management with additional disclosure requirements, will benefit investors, helping them make informed choices about their investments and strengthening fund management processes.”

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