A Liking for Liquid Assets

Despite Brexit, the FCA continues to supervise the financial services industry and even to take stock of the appropriateness of the obligations that it imposes. In fact, something approaching normal life continues.

As Andrew Bailey keeps on saying, financial services regulation has become much too detailed and would be better if based on broad principles. Controversial as it might be, we have seen recent examples of this approach, including the introduction of the Investors’ Best Interest rule brought in as part of the Asset Management Market Study. But in PS 19/24 addressing the problems associated with illiquidity in open-ended funds (, we get the opposite. More rules, more details, more categories, more definitions. The sensation is one of trimming the sails moments before tacking – tacking away from the European shore.

Despite Woodford, the FCA has finally proceeded, in the Policy Statement, with its plans set out in CP 18/27 to address concerns relating to the suspension of a number of authorised property funds after the Brexit referendum, more than three years ago. None of the output from this review is relevant to Woodford; the consultation and the new rules apply only to NURSs, partly because Woodford post-dated the consultation and partly because Woodford’s renowned fund was a UCITS and was therefore regulated under the EU directive. Although the UK could impose gold-plating rules, an approach so often vilified in the past, as Bailey pointed out in his letter of 6thAugust to Lord Myners (, the majority of UCITS funds marketed in the UK are domiciled elsewhere in the EEA and would therefore not be caught by any such FCA measures. Welcome or not, Brexit offers opportunities to raise standards of investor protection where needed. But we aren’t there yet.

The pre-tack trimming looks very similar to the pre-Woodford consultation proposals. Key measures include a new trigger for suspensions, enhanced liquidity-risk management, increased disclosure, greater involvement of depositaries and a new definition to decide which funds are caught. FIIAs, as they will be known, if anyone can pronounce it, (funds investing in inherently illiquid assets), defined intriguingly as a NURS, 50% of whose scheme property[1]is in ‘inherently illiquid assets’, now newly defined, excluding securities listed on an eligible market. Where have we heard that before? Like they say, this does not address Woodford.

Of these new measures, one aspect stands out; that depositaries will have additional duties. With a couple of honourable exceptions, depositaries have built their businesses on the principle of staying below the parapet. A glance at the AMMS suggests that the approach was alive and well when the Investors’ Best Interest requirement went whistling over their heads. You just can’t afford to drop your guard.

But there must be questions over the effectiveness of the new disclosure requirement. Given that a fund can move between being an FIIA and not, the newly-mandated notice will come too late for those already invested. How are they expected to react to the news? With disappointment, perhaps. Or might they take the hint and stampede for the exit, crystallising the suspension risk?

None of this comes into force for twelve months. Meanwhile, we are promised that FCA is considering what to do about the Woodford problem – not the fund, not the firm, not the man, but the rules that allowed illiquidity creep. Some say that Woodford has demonstrated something that we already knew – that you can lose money in an investment fund. They might add that to have one suspension among 3000 authorised funds is an acceptable level of risk. Others, of a more risk-averse disposition and more inclined to focus on perceptions, take a very different view. And, as Bailey has openly criticised the UCITS requirements, appropriate action must follow. Furthermore, as we now know, parliamentarians are on the case and will press for action with their usual display of in-depth knowledge and understanding of the financial services industry.

So, action it will be. What we should expect to see is both the new NURS measures applied to UCITS and the application of most of the FCA’s ideas trailed in the Policy Statement, including the introduction of notice periods for big investors. While many of these steps might have been adopted voluntarily by fund managers as post-Woodford reassurance for investors, we now have, not only the paralysis caused by impending regulation, but also an early divergence from the globally-recognised UCITS standard. How then do we promote the new improved post-Brexit post-Woodford UK UCITS? Lines to take:

  • Our UCITS are better than theirs
  • We do like big investors really
  • Woodford was a one-off, anyway we have sorted it out now and he’s gone away
  • Our investment funds are no longer built on a lie and that nice Mr Carney is going too
  • If you want instant access to your money, buy a new mattress

Maybe we should leave that bit to the advertising consultants.



Originally published by Thomson Reuters © Thomson Reuters


[1]‘Scheme property’: enjoy the FCA’s magnificently circular definition.

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