FCA fires a warning on fund liquidity

The FCA has found that some fund groups have gaps in their liquidity management measures which could lead to consumer harm, and the watchdog is asking asset managers to tighten up their approach to liquidity risk. Managing the liquidity of the underlying portfolio is crucial for open-ended funds, because they can face large withdrawals at the drop of a hat, and need to sell assets in an orderly fashion in order to meet redemptions. While the FCA acknowledges that some firms have achieved high standards in this regard, it broadly thinks there is plenty of scope for improvement, particularly within a minority of asset managers with serious weaknesses in their approach.

It’s worth noting that at the same time the FCA is telling asset managers to manage liquidity risk, the regulator is also in the process of opening up Long Term Asset Funds investing in highly illiquid assets to retail investors. The initial impetus for Long Term Asset funds came from none other than Rishi Sunak, in his former role as Chancellor. The not-so-subtle goal is to tap up the large amount of money sat in pension funds for investment in UK infrastructure and start-ups, to help boost economic growth and fund the transition to greener energy. The government is also reportedly considering requiring pension funds to invest a certain proportion of their money in the UK, including into some illiquid assets. We will perhaps find out more when Jeremy Hunt gives his Mansion House speech next week. The government does seem to be focused on getting that pension money flowing into UK start-ups and infrastructure, despite the illiquid nature of these assets.

If they want to, retail investors can already gain access to illiquid assets like property and infrastructure through investment trusts, which offer the ability to sell their holdings on the stock exchange at any point during the trading day. They can also buy into small start-ups through VCTs, which come with some perky tax reliefs attached. Despite being available for many years, these remain very niche investments. It seems pretty clear then that the drive to get us all investing in illiquid assets is motivated by economic policy, rather than as a result of any significant consumer demand, or even because it’s actually a good idea for private investors. If it’s going to continue going down this route, the government needs to make absolutely sure it’s not opening retail investors up to extra liquidity risks simply so it can meet its own economic targets.