FCA Finalizes Rules for Enhancing Fund Liquidity Risk Management

Key Takeaways

• The Financial Conduct Authority (FCA) has issued Policy Statement PS26/17, finalizing rules to strengthen liquidity risk management for UCITS and Non-UCITS Retail Schemes (NURS).
• These updates aim to improve the use of anti-dilution tools and enhance how authorized fund managers (AFMs) monitor the liquidity of held securities.

Deep Dive

This regulatory update represents a significant shift in the oversight of liquidity risk management within the UK fund management sector. For compliance teams, this means moving beyond a reliance on exchange-based trading data to a more robust assessment of secondary market activity. The FCA is specifically targeting the prevention of "disorderly sales" and ensuring that funds offering daily dealing do not accumulate excessive positions in illiquid securities.

The final rules introduce enhanced expectations for how AFMs utilize anti-dilution tools (ADTs) to protect remaining investors from the costs incurred by entering or exiting investors. Furthermore, the FCA has introduced new Handbook guidance regarding liquidity stress testing, which serves as a UK-specific version of the European Securities and Markets Authority (ESMA) guidelines. Compliance professionals must ensure that their liquidity risk frameworks are updated to reflect these heightened monitoring standards for transferable securities like shares and bonds.

While this specific policy statement finalizes the proposals from Consultation Paper 25/38, it also signals upcoming regulatory activity. The FCA has indicated it will soon consult on wider proposals regarding funds investing in inherently illiquid assets, such as daily-dealt property funds. This suggests a continuous cycle of tightening liquidity management toolkits, including potential new notice periods and deferrals for NURS.

Compliance professionals should immediately conduct a gap analysis of their current liquidity stress testing models and anti-dilution procedures against the new Handbook guidance. It is critical to review how transaction costs are allocated among subscribing, remaining, and redeeming investors to ensure fairness and meet the updated consumer protection objectives. Risk assessments should be updated to account for the increased scrutiny on secondary market liquidity assessments to avoid unexpected liquidity shortages that could trap retail investors.

Source: Financial Conduct Authority