FCA Updates Collective Investment Schemes Sourcebook Regarding Liquidity Management

Key Takeaways

• The Financial Conduct Authority (FCA) has issued an instrument to amend the COLL and FUND handbooks, specifically refining definitions related to dilution and liquidity.
• These changes impact how authorized fund managers disclose policies regarding dealing costs and manage the liquidity risks of transferable securities.

Deep Dive

This regulatory update introduces specific amendments to the FCA Handbook, primarily affecting the Glossary of definitions and the Collective Investment Schemes sourcebook (COLL). The modification to the definition of "dilution" is significant, as it now explicitly includes professional fees and indirect costs resulting from price spreads in the calculation of dealing costs. This ensures that the cost impact on single-priced authorized funds is more transparently captured within the regulatory framework.

For compliance teams, the update necessitates a review of prospectus disclosures and investor relations protocols. The instrument mandates that where an authorized fund manager may require a dilution levy or adjustment, the related statements in the prospectus must be updated to reflect the new terminology and scope. Furthermore, there is a heightened focus on the responsibilities of the authorized fund manager regarding the liquidity and negotiability of transferable securities.

The regulatory changes are set to come into force on 1 February 2027. While the instrument was issued in August 2026, compliance professionals must use the intervening period to audit existing fund documentation and internal liquidity monitoring procedures. The amendment to section 5.2.7B suggests that managers must now actively consider whether the liquidity of a security might compromise their ability to meet redemption requests, even if that security is admitted to an eligible market.

Recommended actions include conducting a gap analysis on all current prospectuses for single-priced authorized funds to ensure compliance with the new disclosure requirements. Additionally, firms should update their internal liquidity risk management frameworks to incorporate the revised presumption regarding the liquidity of transferable securities. Failure to align these processes could lead to regulatory scrutiny regarding investor protection and the adequacy of fund liquidity management.

Source: Financial Conduct Authority