FCA: ‘Gaps observed in liquidity management’ could lead to ‘risk of investor harm’

Regulator warned that firms lack arrangements to combat market-wide redemptions

Tap with coins coming out the spout


A review from the Financial Conduct Authority (FCA) has warned asset managers to focus more on liquidity risk, noting that current “gaps observed in liquidity management” could lead to a risk of “investor harm”.

It added that, while some fund management firms appear to be maintaining a “good” standard of liquidity risk management, there was a “wide disparity” among companies in terms of compliance with regulatory standards, and that some firms in the review were found to have “inadequate” frameworks to mitigate risk.

For instance, the FCA said the basic tools required combat liquidity crises were largely in place, but that the full processes “lacked coherence” and were “not always embedded into daily activities”. It added there was often “insufficient challenge and escalation” when it came to vehicles’ liquidity, as many companies chose not to prioritise liquidity risk management as part of their corporate governance.

See also: “Calastone: Equity funds suffer one of worst months for outflows

The regulatory body also said arrangements were typically put in place by firms to meet “large one-off redemptions”, but firms lacked the correct arrangements to combat market-wide or cumulative redemptions.

Camille Blackburn, director of wholesale buy-side at the FCA, said: “This review should serve as a warning to all asset managers that they need to get this right. We expect boards to discuss our findings and assure themselves that their firms are not among the minority with serious gaps in managing liquidity risk.

“It is vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses.”  

Compatible with the launch of LTAFs?

Laith Khalaf, head of investment analysis at AJ Bell, said it is worth noting that while the FCA is urging fund managers to improve their liquidity management, the regulator is also in the process of launching Long Term Asset Funds (LTAFs) as a means for retail investors to buy into “highly illiquid assets”.

“The initial impetus for Long Term Asset funds came from none other than Rishi Sunak, in his former role as Chancellor,” he explained. “The not-so-subtle goal is to tap up the large amount of money sat in pension funds for investment in UK infrastructure and start-ups, to help boost economic growth and fund the transition to greener energy.

Khalaf added: “If it’s going to continue going down this route, the government needs to make absolutely sure it’s not opening retail investors up to extra liquidity risks simply so it can meet its own economic targets.”

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