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Illiquid Assets - New FCA rules (PS19/24) and “Dear Chair” Letter

  • United Kingdom
  • Financial services and markets regulation
  • Financial services



The FCA published its Policy Statement (PS19/24) in relation to illiquid assets and open-ended funds on 30 September 2019. The statement responds to feedback provided in response to Consultation Paper (CP18/27) and settles on a final slate of new rules, which will apply from 30 September 2020.

Most of the measures proposed in the 2018 consultation have been adopted, although a few of the more controversial proposals (including limiting cash buffers) have not made it into the final policy statement.

Liquidity control clearly remains topical and has proved a significant theme in recent FCA releases, a point clearly reiterated by the release of the 4 November 2019 letter sent by Nick Miller, head of the Asset Management Department at the FCA, to the Chairs of authorised fund managers (“AFMs”) which was also published on the FCA website.

Timing and scope

The timing of the policy statement is worth noting. Although focusing on non-UCITS retail schemes (“NURS”) rather than UCITS funds, the policy statement was delayed to allow the FCA to consider the implications of the suspension of the Woodford Equity Income Fund in June 2019 on the proposals. The policy statement suggests that, in light of the Woodford suspension, the scope of the rules might be expanded in the near future and recognises that sound liquidity management is an essential part of operating any collective investment scheme successfully, not just those that invest in more inherently illiquid assets (such as property funds).

These more general concerns were echoed in the “Dear Chair” Letter; it stresses that effective liquidity management is “an irreducible, core function for all open-ended funds” and asks all managers to review their liquidity management arrangements “as soon as practicable” (regardless of whether this function has been delegated). As part of this review, fund managers and depositaries (where applicable) are encouraged to begin implementing the changes required by PS19/24 well before the September 2020 deadline.

We discuss the November 4 letter and its implications in more detail below, but turning first to the key takeaways from PS19/24:

  • new suspension rules for NURS investing in immovable property
  • new guidance and disclosure requirements for daily dealing NURS funds investing in illiquid assets
  • the introduction of a regulatory sub-category, funds investing in inherently illiquid assets (“FIIA”), for NURS, which brings with it additional regulatory requirements

Suspensions: removing the stigma?

Perhaps the most striking takeaway from the consultation paper was the proposed mandatory suspension mechanism for NURS, where a significant proportion of the assets cannot be correctly valued. As first proposed, the rule would have automatically suspended any NURS if the Standing Independent Valuer (“SIV”) expressed ‘material uncertainty’ about immovable assets accounting for at least 20% of scheme property. Despite significant opposition, the final rules have kept these thresholds in place, but an opt-out has been added. Suspension can now be avoided if both the depositary and the fund manager agree it is in the best interests of investors to continue trading. However, deadlines are tight; the fund manager has two business days following the notification to make the decision and secure depositary approval. If a decision is not made in this time suspension will be automatic. It should be noted that the fund manager can suspend the fund immediately following SIV notification without the approval of the depositary. Fund managers who do not suspend during such a period will have to review the decision to do so every two weeks.

The FCA has indicated that there will be limited circumstances in which this opt-out can be used and ‘setting a fair value price’ will not be accepted as sufficient justification for doing so. The statement is clear that suspension may be in the best interest of investors and even necessary in challenging market conditions, though changes to the fund structure are mooted as a safeguard against mandatory suspension. In particular, the FCA stresses that daily trading may not be appropriate for open-ended funds which deal in immovables and encourages fund managers to consider opting for closed-ended structures.

Though the current rules require a fund manager to re-open a fund ‘as soon as is practicable’ following suspension, the FCA have clarified that this can interpreted broadly. In particular, fund managers are encouraged to ensure they meet redemption requests to avoid further suspensions. The decision to re-open following a mandatory suspension will be subject to depositary approval.

Fire sales: the FCA issues new guidance

The FCA has introduced liquidity management restrictions for daily trading funds investing in illiquid assets. New guidance requires the fund manager to obtain the approval of the SIV before selling immovable assets at reduced rates to meet redemption requests.

The guidance brought forward incorporates some suggestions made during the consultation process. The FCA has removed a clause that would have set out a sliding scale methodology for setting asset prices. Emphasis has also been shifted from value to price, a change which reflects that immovable assets sold at short notice are likely to be offered at a price below their inherent value.

To make use of this tool (or have the possibility of doing so), fund managers will have to disclose their intentions in the fund prospectus. As conceived by the FCA, these measures should allow fund managers to keep a range of tools at their disposal, while allowing investors to make informed choices about possible liquidity risks.

FIIA: the new acronym

The FCA has introduced a new category of fund: a ‘fund investing in inherently illiquid assets’. For a NURS (or similar fund, see below) to qualify as an FIIA it must disclose its intention to invest at least 50% of the scheme property in inherently illiquid assets, or have invested 50% of the scheme property in inherently illiquid assets for at least three continuous months in the last twelve.

The FCA’s definition of ‘inherently illiquid assets’ can be found in the Annex to PS19/24. Attention should be paid to the wording because (as the FCA makes clear in its policy statement) an asset can be illiquid without being ‘inherently’ so. Assets that are immovable (i.e. real estate) are obviously captured, but investments in infrastructure, transferable securities that are not realisable, securities that are not listed or traded on eligible markets and have features which make timely sale impossible, or units in a FIIA (or any similar fund, which could include a QIS) will also qualify as inherently illiquid.

The new FIIA category was introduced despite broad opposition, though the FCA did drop a further proposal to add a mandatory tag to the names of FIIA funds in promotional materials. Aside from NURS, FIIA status may also be applied to any feeder, multi-asset, or fund of funds fund which meets the qualifications outlined above. The final proposals include an exemption for NURS with limited redemption arrangements. The FCA argues that these arrangements offer sufficient protection against the dangers of liquidity mismatches, without the further requirements entailed by FIIA status.

So what are these additional FIIA requirements? The FCA divides these into two categories: Liquidity Management and Disclosure.

Liquidity Management

From 30 September 2020, managers of FIIAs must have a ‘liquidity contingency plan’. This is in addition to existing contingency requirements and must set out:

  • a manager’s immediate response to a liquidity crisis, including a review of the range of liquidity arrangements and tools available
  • the operational risks associated with these responses and the knock on-effect for investors
  • the manager’s internal and external communication arrangements in the event of a liquidity crisis

In response to concerns that this would tie a fund manager’s hands in a crisis, the FCA has clarified that this will be framed as a ‘proposed’ response and plans may be adapted in the light of changing circumstances. The consultation paper proposed a further measure, requiring a FIIA manager to secure written agreements from any third parties cited in the contingency plan, confirming their ability to undertake the relevant matters specified to them. This requirement has been clarified in the wake of critical feedback. Under the redrafted rules, managers will only have to secure written confirmation from ‘relevant’ third parties, as opposed to those whose role is ‘immaterial’. It is currently unclear how these terms will be applied. However, the statement confirms that distribution platforms will qualify as ‘relevant’ third parties if they are used by the FIIA to distribute a significant number of units.

Compliance with the requirement to have a liquidity contingency plan may partially satisfy the requirements of 47(1)e AIFMD level 2 obligations on AIFMs (to minimise an appropriate level of liquidity in an AIF).

FIIA depositaries will have to assess the liquidity profile of the fund and associated risks on a regular basis. Depositaries must put in place processes which allow them to monitor FIIA fund managers’ liquidity management.

The FCA issued additional guidance on FIIA suspensions to better reflect the illiquid nature of their assets. A proposal to issue additional guidance discouraging funds from the accumulation of cash buffers was shelved in the face of significant opposition in the consultation feedback. The FCA concluded that the suspension rules offered investors sufficient protection.

FIIA disclosure

The FCA dropped its proposal to add a mandatory tag to the name of FIIA funds in promotional materials. However, FIIA funds must include a standard risk warning in promotions made to retail investors (this applies to any firms communicating a financial promotion). The same warning will need to be used by some firms in the course of MiFID business.

FIIA prospectuses must also include its liquidity contingency plan, as referred to above.

Looking to the future – other funds investing in illiquid assets

Although the rules apply only to NURS funds investing in illiquid assets, the FCA are concerned about the liquidity of all authorised funds. The last chapter of PS19/24 gives an insight into the FCA’s thinking following the Woodford Equity Income Fund’s suspension in June.

The FCA is considering:

  • introducing notice periods and reduced dealing frequencies for open-ended funds investing in illiquid or less liquid assets
  • introducing separate redemption requirements for large individual holdings
  • further review of the COLL definitions for ‘illiquid’ and ‘less liquid’
  • the level of investor understanding in relation to liquidity risks
  • liquidity stress testing
  • the role of intermediaries and product distribution channels in structuring decisions and providing information to investors
  • introducing new fund structures, such as the currently proposed “Long Term Asset Fund”

“Dear Chair” Letter

The open letter sent to AFMs on 4 November stresses the importance of PS19/24 to the FCA, and confirms that imminent wider action is being taken. Despite the NURS focus of PS19/24, the the FCA expects the chairs of all AFMs to take note of the measures proposed and take appropriate action to safeguard investors. Specifically, firms are urged to revisit their systems, controls and governance as each applies to liquidity risk, reviewing their safeguards against the FCA’s paper “Liquidity management for investment firms: good practice”. AFMs must also consider the appropriateness of assets they invest in against key sections of the Collective Investment Schemes sourcebook (“COLL”), particularly its rules applying to the criteria for the eligibility of transferable securities for a fund and to portfolio composition.

Nick Miller draws attention to IOSCO’s 2018 report and its recommendations for entities responsible for liquidity management. There are 17 recommendations in the letter, including:

  • setting appropriate liquidity thresholds, proportionate to the redemption obligations and liability of the fund
  • ensuring constant access to, or good estimates of, all relevant information
  • regularly assessing the liquidity of assets held in the portfolio;
  • ensuring that liquidity management processes flag up risks as soon as possible
  • using relevant data to arrive at a robust, ‘holistic’ view of risks
  • conducting ongoing assessments, testing a range of different scenarios
  • testing contingency plans periodically to maintain familiarity with all available tools

The FCA urges chairs to conduct these reviews “as soon as practicable”, updating practice where appropriate. Managers were also urged to take note of the FCA’s 2016 guidance paper on liquidity management, “Liquidity management for investment firms: good practice”.


This is unlikely to be the final word on the matter and firms should brace for further regulatory action in relation to governance and systems and controls as they relate to liquidity management. Although in some places dramatic, if the reforms are seen as effective, confidence in open-ended property funds and the industry more generally could be boosted.

Next steps for Managers and Depositaries of NURS funds

Managers and depositaries of NURS funds should scrutinise their fund portfolios and investment strategies (both in the short term and longer term) to determine if they meet the criteria for classification as an FIIA. Some of the requirements will need early engagement with administrators and distributors to ensure that they can support the use of liquidity management tools and acknowledge their role. In addition, the proposed rules will require review of existing liquidity management procedures, compliance manuals and potentially-material amendments to prospectuses (including what tools are available, when they might be used and why) as well as required disclosures in marketing documentation, NURS KIIs/PRIIPs KIDs and factsheets. Distributors will need to be very aware of these requirements (and their role) when promoting to retail.

Next steps for all AIFMs:

Even if a fund is not investing in ‘inherently’ illiquid assets, in light of the “Dear Chair” letter it would be prudent for all AIFMs to review their liquidity management procedures and the liquidity tools currently available to them. In addition, although expressly excluded from PS19/24, managers of QIS funds investing in illiquid assets should also consider the points highlighted in the “Dear Chair” letter and consider their liquidity policies.

How Eversheds Sutherland can help

Our in depth understanding of the sector and experience with the practical implementation of new governance arrangements, means that we are very well placed to guide you through the implementation process and next steps. We regularly advise clients in relation to many of the areas covered in the policy statement, particularly liquidity management tools and policies and reflecting such mechanisms and disclosures in investor documentation.