The FCA has brought in new rules for certain open-ended funds investing in inherently illiquid assets, like property and real estate. The new rules will not apply to UCITS and other funds which already have restrictions in place.

Instead these rules cover non-UCITS retail schemes (NURSs).

The new rules mean that investors must be given clear and obvious information on the risks associated with liquidity, and the fund must be transparent about the circumstances where access to funds may be restricted. Managers of these funds will now be obligated to maintain plans to manage liquidity risk.

The rules aim to protect investors’ interests, especially during stressed market conditions.

The regulator wants to reduce the potential for some investors to gain at other investors’ expense, and to reduce the possibility of runs on funds, which can lead to a ‘fire sale’ of assets, harming fund investors. Such a situation came about shortly after the 2016 EU referendum when several property funds had to suspend dealing.

Under the new rules, the FCA has introduced a new category of ‘funds investing in inherently illiquid assets’ (FIIA). These funds will have to follow extra requirements, including:

1. Increased transparency and disclosure on how they manage liquidity
2. Standard risk warnings in financial promotions
3. Enhanced depositary oversight
4. Providing liquidity risk contingency plans.

However, these requirements will not apply where a fund matches the dealing frequency of its shares to the liquidity of its assets.

NURSs that invest in inherently illiquid assets will have to suspend dealing if the independent valuer decides there is material uncertainty around the value of more than 20% of the fund’s assets, under the new rules. But the FCA has said that, following feedback, it will allow fund managers to continue to deal when they have agreement from the fund’s depositary that this is in the investors’ best interests.

Though these rules do not include UCITS, the high-profile suspension of a recent UCITS fund highlights the wider importance of effective liquidity management in open-ended funds, according to the regulator.

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