FCA confirms new rules for non-UCITS retail schemes investing in inherently illiquid assets

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By Michael McKee, Chris Whittaker
and Dylan Carty

On 30 September 2019, the Financial Conduct Authority (FCA) published a press release confirming new rules relevant to specific forms of open-ended funds, which invest heavily in inherently illiquid assets (such as property). The rules were established in an effort to make sure that individuals investing in illiquid assets were appropriately protected, principally during times where the financial market is experiencing stressed market conditions.

Under the new rules which will come into effect on 30 September 2020, funds known as non-UCITS retail schemes (NURSs) will be required to provide more “clear” and “prominent” information to investors regarding the liquidity risks of the fund and circumstances which may lead to the fund restricting investor accessibility to invested funds.

Authorised managers of NURSs are faced with having to comply with increased regulatory obligations to manage liquidity risks if the funds they manage invest predominantly in illiquid assets. The FCA wanted to clearly establish the requirement that authorised fund managers should act in the best interests of their investors.

The new rules also establish:

  • The introduction of Funds Investing in Inherently Illiquid Assets (FIIA). Funds classified under this category will face further disclosure obligations and oversight requirements, although these will not be required in the instance where a fund “matches the dealing frequency of its shares to the liquidity of its assets”; and
  • That NURSs which invest in inherently illiquid assets must suspend dealings when an independent valuer has deemed that the value of more than 20 percent of the fund’s assets face “material uncertainty”.

During consultation, many submissions cautioned the FCA against imposing a hard percentage requirement for the suspension of trading. Such a hard target may result in unintended consequences such as strategic trading and further uncertainty in valuations. Nevertheless, the FCA has imposed the 20 percent threshold in order to protect investors.

The FCA and Bank of England are currently assessing what steps can be taken to ensure fund’s redemption terms are “better aligned” with the liquidity of the assets they hold. Further details may be found in the Policy Statement.