FCA criticises asset managers’ plans to cope with large-scale redemptions

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The UK’s top financial regulator has sharply criticised asset managers for potentially leaving their investors exposed to harm, after finding that firms’ plans to cover large-scale redemptions “lacked coherence”.

The Financial Conduct Authority on Thursday urged companies to take action and cover gaps in times of stress following a survey of liquidity management at 14 asset managers, authorised fund managers and investment and portfolio managers.

The FCA’s warning comes amid mounting concern from regulators’ globally about risks in the global funds industry, where volatile markets, high interest rates and slowing economic growth could trigger a disruptive wave of redemptions and exacerbate market instability.

The UK exercise did not include property funds, which global securities regulators on Wednesday said should be subject to new rules to reduce the risk of funds not being able to sell investments quickly enough, in an attempt to discourage an investor rush for the exit.

The UK has also seen more idiosyncratic issues with liquidity in funds, most notably the 2019 collapse of Neil Woodford’s equity funds, which was triggered by a combination of poor stock selection and holdings in illiquid shares, which trapped thousands of investors.

The FCA’s survey found many asset managers used assumptions “that were not appropriately conservative” to test the liquidity of their portfolios. Nor did many consider how easy it was to sell a slice of its entire portfolio, it found.

The regulator also singled out concerns that funds had arrangements in place to meet large one-off redemptions, but did not have sufficient plans to manage cumulative or marketwide redemptions “that could have a significant impact on a fund”.

“We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors,” said Camille Blackburn, a director at the FCA, She added that the regulator’s exercise “should serve as a warning to all asset managers that they need to get this right”.

“The building blocks and tools for effective liquidity management were mostly in place, but these lacked coherence when viewed as a full process and were not always embedded in daily activities,” Blackburn wrote in a letter to chief executives of asset management companies.

Some fund groups have taken action recently to bolster liquidity in other ways. Jupiter Asset Management said this year it would no longer make new investments in unlisted stocks, just as it offloaded its stake in private company Starling, a digital bank. The firm said at the time that “investor sentiment towards holding unlisted assets in open-ended funds has changed”.

The FCA wants firms to improve the oversight of liquidity management risks, including ensuring there is clear accountability for managing the risks, and that those who bear the responsibility have “sufficient expertise”.

They also want firms to improve their liquidity management tools and stress testing.