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FCA launches discussion on fund liquidity

City of LondonThe UK financial regulator has launched a discussion about the fair treatment of investors in open-ended funds that invest in illiquid assets.

In the Financial Conduct Authority (FCA) discussion paper the regulator asks for comments about the right level of regulatory intervention when funds are affected, and if the FCA should develop a secondary market in the units of open-ended funds investing in illiquid assets.

Illiquid assets may include land and buildings, infrastructure and financial assets such as unlisted securities.

The regulator says investing in illiquid assets provides investors with benefits including strong investment returns.

But one of the key issues is the balance of interests between investors who want to withdraw their money and those who want to remain.

Open-ended funds that invest in illiquid assets can encounter difficulties if investors expect to be able to withdraw their money at short notice, the regulator says, with reference to the liquidity issues experienced by some UK property funds after the Brexit referendum in June last year.

It can be difficult for a manager to calculate the price of a fund every day if that fund invests in illiquid assets whose prices are calculated less frequently than every day, the FCA says, adding this can be exacerbated if an event in the market triggers an upsurge in redemption demand.

Megan Butler, executive director of supervision – investment, wholesale and specialist at the FCA, said: “We want to engage with fund managers and the investors whose money they manage to understand what problems they think exist.

The FCA is seeking feedback by May 8, 2017.

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