Global menu

Our global pages


FCA CP18/27: Consultation on illiquid assets and open‑ended funds and feedback to Discussion Paper DP17/1

FCA CP18/27: Consultation on illiquid assets and open‑ended funds and feedback to Discussion Paper DP17/1
  • United Kingdom
  • Financial services and markets regulation



We welcome the FCA’s recent publication of Consultation Paper (CP18/27) setting out its proposals for funds which invest in inherently illiquid assets (“FIIAs”), and in particular the proposals to remove the stigma of suspension of dealing in funds invested in illiquid assets, including property.

The CP follows on from the FCA’s discussion paper DP17/1 in response to the suspension of trading in property funds in 2016 following the result of the UK referendum on membership of the EU.

This event raised a number of questions, including:

• How fund managers use different liquidity risk management tools

• How to strike a fair balance between the interests of investors wishing to redeem their holdings and those wishing to remain invested in the fund.

CP18/27 takes its starting point as DP17/1 and the responses to it and further takes into account the results of the FCA’s supervisory work and IOSCO’s final report on “Recommendations for Liquidity Risk Management for Collective Investment Schemes” published in February 2018.

The FCA has concluded after a review of its rules and guidance that there does not need to be a wholesale review of the Rulebook in respect of illiquid assets but that there are some lessons to be learnt and improvements which can be made in some areas. The Consultation Paper does not therefore introduce any new liquidity management tools or change access to property funds for retail investors. Nor has the FCA sought to prevent property funds being established as daily dealing funds.

The focus of the CP is the protection of retail investors investing into funds which hold illiquid assets. As a result the proposals only impact NURS funds holding illiquid assets as these can be sold to retail and it was in relation to NURS property funds that all the suspensions of dealings following the referendum took place. UCITS and QIS are not impacted other than in respect of the proposals about cash buffers and that a QIS may be defined as an illiquid investment in certain circumstances.

The target is in fact even more narrowly focussed and the proposals only apply to a new category of fund being created by the FCA, the so-called FIIA or funds investing in inherently illiquid assets. An FIIA is defined as one of the following:

• A NURS which has disclosed in its objective and policy that the fund aims to invest at least 50% of its assets in inherently illiquid assets

• A NURS which has invested at least 50% of the scheme property in inherently illiquid assets for at least three consecutive months out of the last twelve even if that has not been specifically disclosed to investors

The FCA has not sought to exhaustively define what constitutes an inherently illiquid asset but it will include: immovables, investments in infrastructure, transferable securities which are not readily realisable, a unit in an FIIA, shares in an SPV investing in an infrastructure project etc.

The following proposals are being consulted on:

“Mandatory” suspension of dealing in units

• NURS funds holding property and other immovables must suspend dealing if the standing independent valuer (“SIV”) believes there is “material uncertainty” about the valuation of at least 20% of the scheme property. The FCA considers that this is a preferable approach to continuing to buy and sell at a price which may not be a true reflection of the position. This does appear to put a heavy burden on the SIV but it reflects a methodology which is already reflected in The Red Book

• In addition, funds which themselves invest in funds holding immovables will be required to suspend dealing where the underlying fund has suspended dealing for material uncertainty This will cover feeder funds as well as any other NURS fund (eg a multi-asset fund) where at least 20% of the value is invested in such funds

• Depositaries will no longer be required to approve a suspension where this is mandatory in the case of material uncertainty

Improving the quality of liquidity risk management

• Managers are to be required to produce contingency plans so that they are better prepared to deal with liquidity events. There are already requirements under the AIFMD to have a liquidity management process in place and the FCA proposals build on these requirements. The contingency plan will need to:

o describe how the fund manager will respond to a liquidity risk

o set out the tools available to manage liquidity, the operational challenges arising and the impact for investors

o include communication arrangements for internal and external parties and details of how the fund manager will work with its service providers in the event of a liquidity crisis

Key to the plan will be obtaining written confirmation from third parties that they can be relied upon to deliver the contingency plan. In particular, administrators will need to put in writing that they can support the specific liquidity tools proposed by the manager, including deferred redemption

• The FCA is also consulting on a power to allow managers to offer an asset at a discount in order to meet redemption requests. This must be agreed with the SIV and the intention to use such a power set out in the Prospectus

• The duties of a depositary will be extended to require them to oversee the liquidity management processes of fund managers. Depositaries do of course currently carry out oversight of specific processes but may not have the skill set to review liquidity management. This may add additional cost into a depositary fee

• The FCA has also given further specific guidance on liquidity buffers and particularly the practice of holding large amounts of cash in anticipation of needing to meet a large redemption or redemptions. The FCA proposes to introduce guidance (which will also apply to UCITS and QIS) that this is not an acceptable practice

Increased disclosure

• Funds investing mainly in illiquid assets will be required to include an “identifier” following the fund name where communication is made to retail investors. The identifier is that the fund is a fund investing in inherently illiquid assets (FIIA) to flag the nature of the investment to investors upfront. This does not require a name change or indeed that the identifier be used every time the fund is mentioned but it does need to be used appropriately in communications

o for example, “ABC Property Fund, a fund investing in inherently illiquid assets”

• Prospectus will be required to disclose details of liquidity risk management strategies, including tools and the potential impact on investors. It is questionable whether this will be an effective remedy and will effect any meaningful change. Many prospectus already include detailed provisions on liquidity management tools and many investors do not read the prospectus in any event

• There will be a requirement to include a standard risk warning in financial promotions relating to such funds to retail clients. This will apply not only to managers of funds but will be applicable to all firms making financial promotions of such funds. The NURS-KII will not need to include the risk warning.

To read CP18/27, Consultation on illiquid assets and open‑ended funds and feedback to Discussion Paper DP17/1, click here.

To read DP17/1, Illiquid assets and open-ended investment funds, click here.

To read the FCA’s findings from DP17/1, click here.

To read IOSCO’s “Recommendations for Liquidity Risk Management for Collective Investment Schemes”, click here.

Responses to the CP are invited by 25 January 2019. To respond, click here.


Any manager or depositary of a NURS investing in ‘inherently illiquid assets’ and particularly those with retail investors should consider the potential remedies in the Consultation Paper.

Some of the proposed remedies will require consultation with standing independent valuers and, possibly, industry-level engagement with the Royal Institution of Chartered Surveyors (“RICS”). There will also need to be engagement with service providers such as administrators to get sign off that they can support the use of liquidity management tools.

Additionally, as drafted, the proposed rules would require at least a review of existing liquidity management procedures, compliance manuals and potentially-material amendments to prospectuses (including what tools are available, when they might be used and why), NURS KIIs/PRIIPs KIDs and factsheets.

The suggested addition of the new identifier in the name of a fund in certain circumstances might require an actual change of the fund’s name in the systems of platforms and other third party agents who are not able to only include the label some of the time.