European watchdogs set to tighten screw on Ucits liquidity

FCA was criticised for its response to liquidity problems in light of Woodford


European regulators are tightening the screw on Ucits liquidity in the wake of high-profile crises at asset management groups, cranking up pressure on the UK’s watchdog which is under fire for its lacklustre response.

The Central Bank of Ireland and the Europe Union’s financial regulator, the European Securities and Markets Authority (Esma), have committed to more stringent stress testing by individual regulators across the bloc in the aftermath of liquidity failings at Woodford Investment Management and H2O Asset Management.

Delivering a keynote speech at the European Fund and Asset Management Association (Efama) Investment Management Forum in Brussels last Friday, Esma chairman Steve Maijoor said “two events affecting Ucits recently have drawn attention to liquidity risk”.

EU seeks common methodology on Ucits liquidity

Maijoor went on to announce from next year Esma will oversee “common supervisory action on liquidity management by Ucits in order to foster convergence and promote consistent supervision with regard to liquidity risks”.

He added: “This is an exercise under which EU NCAs (national competent authorities) will agree to simultaneously conduct supervisory activity in 2020 on the basis of a common methodology to be developed together within Esma.

“This initiative, and the related sharing of practices across NCAs, should represent a significant supervisory effort which is expected to help ensuring consistent application of EU rules on Ucits liquidity management and ultimately enhance the protection of investors across the EU.”

Ireland’s central bank reflects on Woodford

It comes with backing from the Central Bank of Ireland which has also vowed to take a closer look at Ucits liquidity.

Speaking at an Irish Funds conference last Thursday, Central Bank of Ireland director of policy and risk Gerry Cross said: “Recent cases, including the Woodford funds and others, have raised questions as to whether existing rules in respect of liquidity risk are sufficient. In light of this it is needed to reflect on whether the rules and guidance currently in place are sufficient or whether they need to be further developed.”

He added: “It is important that there should not be a mismatch between investors’ expectations and what a fund is able to deliver in terms of daily redemption, in particular during times of stress. This is an area where you can expect to see us and other supervisors focus in the coming period.”

According to a Reuters report, there are 200 UK-based asset managers running Irish domiciled funds holding about £642bn in assets.

FCA liquidity measures underwhelmed

The UK’s regulator, the Financial Conduct Authority, and the Bank of England are currently investigating liquidity in open-ended funds, but the FCA has come in for criticism for its failure to include Ucits in its measures to address liquidity risk in retail funds.

The BoE and the FCA are expected to update on the progress of the review as part of the bank’s Financial Stability Report on 10 December.

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