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FCA and Bank of England: Review of Open-ended Funds

FCA & Bank of England: Review of open-ended funds

13th January 2020

Last month, the Financial Policy Committee (FPC) published its Financial Stability Report that set out its findings of a joint review by the FCA and the Bank of England on open-ended investment funds and the risks posed by their liquidity mis-match.

The purpose of the Financial Stability Report is to lay out the Financial Policy Committee's view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it.

Having reviewed the progress of work, the FPC identified that, if greater consistency between the liquidity of a fund’s assets and its redemption terms is to be achieved that:

• Liquidity of funds’ assets should be assessed by reference to the price discount needed for a quick sale of a representative sample (or vertical slice) of those assets or the time period needed for a sale which avoids a material price discount. In the US, the Securities and Exchange Commission has recently adopted measures of liquidity based on this concept.
• Redeeming investors should receive a price for their units in the fund that reflects the discount needed to sell the required portion of a fund’s assets in the specified redemption notice period, ensuring fair outcomes for redeeming and remaining investors.
• Redemption notice periods should reflect the time needed to sell the required portion of a fund’s assets without discounts beyond those captured in the price received by redeeming investors.

The FPC will now continue to review how these principles could be implemented in a proportionate and effective manner from which the FCA will then use the review’s conclusions (anticipated during 2020) to inform the development of the regulators’ rules for open-ended funds.

This follows on from the Regulator’s letter to Chairs of Authorised Fund Managers (AFMs) in November 2019 in relation to Effective Liquidity Management practices in the authorised funds that they operate and the FCA’s Policy Statement (PS19/24) published on 30 September 2019 relating to illiquid assets and open-ended funds that outlined various measures to strengthen the regulatory framework in this area.

Given the global nature of asset management, the FCA recognise that the conclusions from the review “could also be used by UK regulators in international work at the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and with other competent authorities.”

The FPC’s Review is expected to be published over the course of 2020, however no official date has yet to be announced.

Related Reading:

• New Rules: Illiquid Assets & Open-Ended Funds

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