The Financial Conduct Authority (FCA) will introduce tougher rules for funds that invest in hard-to-sell assets following the suspension of Neil Woodford’s flagship fund.
In a policy statement published today, the financial regulator also said investors should be given better warnings about the risks they face if they want to be able to withdraw their funds at short notice.
The FCA said that retail investors “were not aware of, or did not appear to understand, the liquidity risk to which they were exposed” when they invested in Woodford’s Equity Income Fund (EIF), which was suspended in June after becoming overwhelmed by investor withdrawals.
The EIF was unable to meet withdrawal requests because of the large proportion of illiquid assets in its portfolio, which the FCA said “again raises the question about the appropriateness
of an open-ended fund that invests in illiquid or less liquid assets offering daily dealing”.
The FCA said it was in favour of fund suspensions as a way of avoiding “fire sales” of assets – when fund managers are forced to offload holdings at discounted prices.
The new policy guidelines published today cover open-ended funds with illiquid assets rather than equity or bond funds, but the regulator said it was considering extending the rules to the wider fund industry in the wake of the Woodford saga.
Under the new guidelines, the watchdog will introduce a new category of funds that invest in inherently illiquid assets (or FIIA) in September 2020. The funds will be subject to additional requirements including a requirement to produce liquidity risk contingency plans.
The funds will also have to suspend dealing when it is determined that there is “material uncertainty” regarding over 20 per cent of its assets.
Ryan Hughes, head of active portfolios at AJ Bell, said the new rules could result in the frequency of suspensions increasing. Hughes said the FCA appeared to be “trying to take away the stigma of suspensions”, but warned the need for more suspensions would be “a difficult argument” to get across to investors.
“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,” Woolard added.