FCA proposes new rules on long-term investment funds

The Financial Conduct Authority (FCA) has proposed new rules on long-term investment funds, aiming to make them clearer and give investors greater confidence to invest in funds that support private markets.

It is consulting on changes to retail investment fund rules to ensure a fund’s redemption terms reflect the time it typically takes to sell illiquid assets.

The regulator said it was setting out clearer expectations for asset managers about long-term investments, such as property.

Under the new rules, investors will have to give 90 days’ notice to access their funds but will be provided with greater certainty that they will receive their money.

The FCA said it wanted to set clear standards for how firms design and operate their investment products and reduce the risk of investors buying unsuitable products.

This means that funds should be clearer from the outset about how quickly investors can get their money back and whether the fund is right for their needs.

The regulator noted that, currently, some of these funds allow investors to take money out daily without a notice period, meaning there was a risk that some funds may suspend payments due to a lack of available cash during periods of stress or volatility.

Furthermore, it highlighted that some were also holding extra cash, leaving less invested in their intended assets.

The FCA warned that rushed sales can lower prices, harm investors who stay invested, and put pressure on markets.

The proposed notice period aims to give managers time to sell assets in an ‘orderly way’ and make liquidity-driven suspensions less likely.

Existing funds will have two years to comply with the new rules and give investors a minimum of one year’s notice.

The proposals seek to bring the UK in line with new international liquidity standards for open-ended funds.

“Funds should be clear about whether they offer quick access or are built for longer-term investments like property,” said FCA director, markets, Michelle Beck.

“Our rules will help firms make that clearer and give the market more confidence to invest.”

AJ Bell head of investment research, Paul Angell, commented: “This consultation is a timely reminder that liquidity matters. Funds investing in inherently illiquid assets can present real challenges if investors are promised quick access to their money in a fund where the underlying holdings may take weeks or months to sell.

“History has shown the problem with this mismatch. In periods of stress, investors who move quickly may be able to get out while there is still cash or more liquid assets available in the fund, leaving those who remain behind exposed to the possibility of declining performance, dilution and, in the worst cases, suspension.

"That is a clear threat to consumer investment outcomes and can have damaging long-term consequences for confidence in investing.

“If a fund owns assets that cannot be sold quickly without imposing costs on other investors, that is clearly an issue and it is sensible that redemption terms will be looked at by the regulator.

"That said, imposing a lengthy notice period to get money out of a fund is not going to appeal to a lot of investors, so the implications of these proposals need to be considered carefully.

“Additionally, strengthening disclosures around waiting times and the associated market risk - time in the market between sell order and dealing cut off - is inherently difficult due to the complexity, and the proposals will likely present operational challenges for platforms, model portfolio services and other parts of the distribution chain."

---