The Financial Conduct Authority (FCA) has launched a consultation into how fair redemption terms work for funds that invest in illiquid assets, as interest in private markets has thrown liquidity risks into the limelight.
The regulator noted that when open-ended funds invest in illiquid assets such as real estate, they may need to pay investors before they can sell those assets, creating a portfolio mismatch.
“In recent years, there has been significant growth in private markets,” the FCA noted. “These are an important route for professional and, increasingly, retail investors to diversify their investments.
“It is important that funds investing in real estate and other private market assets take account of this reduced liquidity,” the regulator said.
The consultation proposes a minimum notice period for NURS (Non-UCITS Retail schemes) with at least 50% of their value invested in illiquid assets, to better reflect the time it takes to sell.
The regulator will be taking comments on the paper until 11 December 2026.
Paul Angell, head of investment research at AJ Bell, generally praised the consultation but warned there will be challenges.
“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 the regulator will look at redemption terms.
“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,” Angell said.
On top of this, strengthening disclosures around waiting times is an inherently difficult task because of market complexity, he noted. As a result, “the proposals will likely present operational challenges for platforms, model portfolio services (MPS) and other parts of the distribution chain”.
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