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By Huw Jones
LONDON, Sept 30 (Reuters) - Britain's markets regulator
published tougher rules on Monday for funds that invest in
hard-to-sell assets like property, saying investors must get
better warnings about the risks they face if they want their
money back at short notice.
The Financial Conduct Authority (FCA) said it will introduce
a new category of funds investing in inherently illiquid assets,
or FIIA, from September 2020, confirming proposals made last
October.
"The new rules and guidance are designed to protect the
interests of investorsm particularly during stressed market
conditions," said Christopher Woolard, the FCA's executive
director for strategy and competition.
"This includes those wishing to redeem their holdings, as
well as those wishing to remain invested in the fund."
The funds will be subject to additional requirements,
including standard risk warnings in financial promotions,
enhanced depositary oversight, and a requirement to produce
liquidity risk contingency plans, it said.
Funds investing in property had to be "gated" to suspend
redemptions during market stress immediately after the result of
Britain's referendum to leave the European Union in June 2016.
The funds were unable to meet promises of daily redemptions,
prompting Bank of England Governor Mark Carney to describe such
funds as being "built on a lie".
The FCA came under further pressure from lawmakers to
intervene after high-profile fund manager Neil Woodford
suspended his flagship equity income fund in June, which
promised daily redemptions.
The Woodford fund was unable to meet a flood of redemptions
and was found to have breached a rule limiting how much it can
invest in illiquid assets.
The FCA assessed whether any lessons might be relevant to
the issues covered in its new rules.
It said its new rules will not apply to EU-regulated funds
known as UCITS, that include the Woodford fund, even though FCA
Chief Executive Andrew Bailey has described the bloc's rules as
"flawed".
The Woodford fund breached a rule that allows no more than
10% of a fund in illiquid assets, known in the industry as the
"trash" ratio.
Britain's Investment Association, a trade body for asset
management, said the FCA's "pragmatic and measured" approach
recognised the need to enable investment in illiquid assets
through open-ended funds. But all open-ended funds could face
more rules once the Bank of England and FCA complete a separate
review.
That review is assessing how funds’ actual redemption terms
- rather than just how existing ones are applied - might be
better aligned with the liquidity of their assets in order to
minimise financial stability risks, and provide appropriate
protection to investors.
Policymakers are also keen to ensure that funds that invest
in illiquid assets like infrastructure are at a competitive
disadvantage to funds that invest only in highly liquid assets
like shares.
(Reporting by Huw Jones; editing by Carolyn Cohn, Larry King)
