FCA consults on rules for investing in illiquid assets

David Morrey David Morrey

The long-awaited consultation paper (CP18/27) follows the FCA’s discussion paper in February 2017, the publication of results from supervisory work into property fund suspensions and IOSCO’s publication of Recommendations on Liquidity Risk Management for Collective Investment Schemes.

The consultation proposes new rules and guidance that will apply to non-UCITS retail funds investing in illiquid assets. These rules add to requirements already in place from the Alternative Investment Fund Management Directive and the EU Commission’s delegated regulations.

The CP proposes changes intended to reduce the risk of runs on open-ended property funds, improve liquidity risk management in funds investing in illiquid assets, and improve risk disclosures made to investors. The consultation runs until 25 January 2019.

New fund category – FIIAs

The FCA proposes to introduce a new category of funds titled “funds investing in inherently illiquid assets” or FIIAs for short. Funds included in this category would be those that have disclosed their intention to invest at least 50% of the fund’s assets in inherently illiquid assets or funds that, over the last three months, have invested at least 50% of their funds in such assets.

In addition, funds whose assets include units in other funds (eg fund of funds), that invest in inherently illiquid assets and where the value of the underlying inherently illiquid assets accounts for at least 50% of the fund’s assets, will also be captured by the new FIIA definition. The FCA proposes to exempt funds from the FIIA classification where fund redemption frequency is limited to reflect the typical time required to liquidate assets held by the fund.

The FCA has opted not to introduce a prescriptive list of assets considered inherently illiquid. Instead they have proposed a set of characteristics that define these assets. All of the new requirements set out below apply only to FIIAs.

Suspensions of trading

The FCA proposes to introduce a requirement for fund managers to suspend dealings in units of their fund when there is 'material uncertainty' about the valuation of immovables that account for at least 20% of the fund’s assets. The requirement also applies to funds with indirect exposures to immovables, eg multi-asset funds, when the material uncertainty of the value of immovables amounts to at least 20% of the indirectly exposed fund’s assets.

The FCA is also proposing to change the role of depositaries in temporary suspensions of dealings. The current requirement that a fund manager needs to gain the depositary’s permission before invoking a suspension would be replaced by a requirement only to notify the depositary.

Other proposals 

The FCA is proposing additional requirements for liquidity risk management, including requiring fund managers to have contingency plans in place. The proposals also extend the depositaries duties to include oversight of FIIAs liquidity management process. 

Another proposal aimed at increasing investor awareness is the inclusion of specific liquidity risk warning in key documents and the introduction of an identifier added to a fund’s name to signify they invest in illiquid assets. The enhanced disclosures to investors should include information about liquidity risk management techniques the fund manager uses and the possible impact these may have on investors.

Next steps

Following the end of the consultation in January 2019, final rules and guidance are expected to be issued later in 2019 and come into force one year later.


  1. The Financial Conduct Authority, Consultation on illiquid assets and open-ended funds and feedback to Discussion Paper DP17/1, 2018

To find out more or to discuss these consultations please contact David Morrey.