LONDON (Reuters) – Britain’s markets regulator published tougher rules on Monday for funds that invest in hard-to-sell assets like property, saying investors must get better warnings about the risks they face if they want their money back at short notice.
The Financial Conduct Authority (FCA) said it will introduce a new category of funds investing in inherently illiquid assets, or FIIA, from September 2020, confirming proposals made last October.
“The new rules and guidance are designed to protect the interests of investors, particularly during stressed market conditions,” said Christopher Woolard, the FCA’s executive director for strategy and competition.
“This includes those wishing to redeem their holdings, as well as those wishing to remain invested in the fund.”
The funds will be subject to additional requirements, including standard risk warnings in financial promotions, enhanced depositary oversight, and a requirement to produce liquidity risk contingency plans, it said.
“This means we’re likely to see funds suspend dealing more frequently and sooner than they would have done in the past,” said Ryan Hughes, head of active portfolios at investment platform AJ Bell.
The FCA backed down on plans to stop property funds continually having a large cash buffer, Hughes added.
Funds investing in property had to be “gated” to suspend redemptions during market stress immediately after the result of Britain’s referendum to leave the European Union in June 2016.
The funds were unable to meet promises of daily redemptions, prompting Bank of England Governor Mark Carney to describe such funds as being “built on a lie”.
The FCA came under further pressure from lawmakers to intervene after high-profile fund manager Neil Woodford suspended his flagship equity income fund in June, which promised daily redemptions.
The Woodford fund was unable to meet a flood of redemptions and was found to have breached a rule limiting how much it can invest in illiquid assets.
The FCA assessed whether any lessons might be relevant to the issues covered in its new rules.
It said its new rules will not apply to EU-regulated funds known as UCITS, that include the Woodford fund, even though FCA Chief Executive Andrew Bailey has described the bloc’s rules as “flawed”.
The Woodford fund breached a rule that allows no more than 10% of a fund in illiquid assets, known in the industry as the “trash” ratio.
Britain’s Investment Association, a trade body for asset management, said the FCA’s “pragmatic and measured” approach recognised the need to enable investment in illiquid assets through open-ended funds. But all open-ended funds could face more rules once the Bank of England and FCA complete a separate review.
That review is assessing how funds’ actual redemption terms – rather than just how existing ones are applied – might be better aligned with the liquidity of their assets in order to minimise financial stability risks, and provide appropriate protection to investors.