FCA eyes 90-day redemption rule on illiquid funds to end mass withdrawals
The UK’s financial watchdog has proposed changes to retail investment fund rules in a bid to reduce the risk of rushed asset sales during market volatility.
The Financial Conduct Authority (FCA) floated a minimum 90-day notice period for investors withdrawing from long-term investment funds holding illiquid assets such as infrastructure and private equity, in its latest consultation paper.
This would end current practices where funds allow clients to take money out daily with no notice period, leaving them vulnerable during times of market stress and volatility.
Turbulent periods can often spark a sudden wave of investor withdrawal requests, leading fund managers to run out of enough liquid capital to satisfy the redemptions forcing them to suspend the fund.
An influx of withdrawals can also harm investors who are too slow to react, leaving them holding a frozen, illiquid fund.
Funds will only be able to process redemptions once per month, under the mooted plans, and the combined notice and settlement period will not be allowed to exceed 185 days.
Michelle Beck, director, markets, at the FCA, said: “Funds should be clear about whether they offer quick access or are built for longer-term investments like property.”
The Woodford legacy
Long-term investment funds have come under increased scrutiny from the watchdog in recent years, following the collapse of disgraced fund manager Neil Woodford’s Woodford Equity Income Fund (WEIF).
The fund – once one of the UK’s largest and most successful – was suspended in June 2019, leaving investors unable to access their money and trapping around £3.7bn in hard-to-sell assets in what was one of the most dramatic collapses in UK investment history.
The fund’s assets under management had fallen from a high of over £10.1bn in May 2017 to just £3.7bn in the run-up to its suspension.
The FCA concluded that between July 2018 and June 2019, Woodford “made unreasonable and inappropriate investment decisions”, disproportionately selling more liquid investments and buying less liquid ones.
By the time of the suspension, only eight per cent of investments held by WEIF could be sold within seven days.
This broke rules in place at the time, which stated investors should be able to access their funds in seven days.