Stock Market

UK regulator gets tough on investment funds to improve liquidity management

In a bold move, the Financial Conduct Authority (FCA) of Britain has issued a stern warning to certain asset managers who have failed to handle liquidity effectively. This failure not only poses a threat to market stability but also jeopardizes the ability of investors to withdraw their funds. The FCA, concerned about the suspension of property funds and the challenges faced by liability-driven investment funds last September, is now shining a spotlight on the capability of asset managers to generate enough cash to meet investor redemptions and collateral calls.

According to the FCA’s comprehensive review of asset managers, while some companies demonstrate commendable standards, the majority fall short in certain areas of liquidity management. Shockingly, a minority even lack adequate frameworks to effectively mitigate liquidity risks.

As it stands, these observed gaps in liquidity management could have detrimental effects on investors. The FCA unequivocally stated, “Investor harm becomes a tangible risk under these circumstances.”

It is worth noting that the FCA had already urged firms to scrutinize their liquidity arrangements in 2019. Now, the boards of asset managers must meticulously analyze the findings of the review. The FCA emphasizes the urgent need for the underperformers to take swift action, as failure to address these weaknesses may lead to regulatory intervention.

Additionally, asset managers must conduct liquidity stress testing with due diligence and employ liquidity management tools appropriately. In stressed markets, certain funds have struggled to fulfill their promise of daily redemptions. In response to this concern, global regulators recently proposed a new system to categorize open-ended funds, putting an end to unrealistic daily redemption assurances.

The FCA stressed the importance of aligning fund redemptions with the funds’ terms and the manner in which they are marketed. Furthermore, investors must have the ability to redeem at an accurate price that truly reflects the value of their investments. This ensures fairness for both the investors remaining in the fund and those redeeming their shares.

In essence, the FCA’s message is clear: investment funds must enhance their liquidity management practices to safeguard the interests of investors and maintain a fair and stable market. It’s time for asset managers to step up their game, or face the consequences of regulatory intervention.

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