The FCA has been accused of ignoring an impending liquidity crisis by limiting its fresh rules for open-ended funds to non-Ucits retail schemes (Nurs).
FCA boss Andrew Bailey had said the regulator would take into account the lessons learned from the Woodford Equity Income suspension when finalising the policy, which had initially been conceived in response to property fund suspensions in the aftermath of the EU referendum.
The FCA had closed its consultation by the end of January and was expected to publish its findings at the end of June until it was derailed by the suspension of Neil Woodford’s fund.
However, investors felt unimpressed with the rule changes it revealed.
Nurs managers must now clearly signpost liquidity risks and situations in which investors may not be able to get cash out. The FCA also confirmed the launch of a new class of illiquid asset funds for retail investors, which would be allowed to hold 50% of client funds in harder-to-trade assets as long as they are clearly labelled.
Gina Miller hits back at FCA’s ‘inadequate action’
SCM Direct founder Gina Miller (pictured) described the FCA’s rule change as “more tick box regulation that is bound to fail consumers yet again”.
“In my view, the new FCA’s rules for open-ended funds investing in illiquid assets after the Woodford scandal is yet another example of inadequate action by the regulator in terms of protecting retail investors. Consumers will not be protected by mere risk warnings and firms’ contingency plans.
“How many more failings before the government investigate if the FCA and its chief executive is up to the job of treating customers fairly and protecting them?”
FCA liquidity rule change has little value
Fund Expert managing director Brian Dennehy says Nurs funds are used over Ucits funds “precisely because they may invest in assets for which it is harder to confirm an accurate price, and which may be more illiquid”.
Currently the regulator has a 10% hard limit for unquoted stocks in Ucits products. Under its new rules Nurs funds that hold illiquid assets like commercial property and infrastructure, will be required to suspend trading when there is “material uncertainty” about the valuation of more than 20% of their assets.
“Any fund group running Nurs knows the liquidity risks,” says Dennehy. “Is there evidence that such fund groups are not then making that liquidity risk clear to investors in the fund?”
Dennehy doubts the requirement has “any value at all beyond them being able to say at some point in the future ‘well, we did tell the fund group’.”
Great liquidity crisis lies ahead
Dennehy says by limiting the scope of the consultation to “certain types” of open-ended funds instead of broadening it out to include the much larger Ucits universe, the FCA is ignoring “a much bigger problem” that “goes way beyond the stale and parochial Ucits vs Nurs vs investment trusts debate”.
“‘The Great Liquidity Crisis’ lies ahead and it will be ugly,” he says.
“The closure of Gam funds last summer was an early warning. There have been other liquidity problems since, but obviously the problems with Woodford Investment Management have taken this mainstream.
“This should have been a big wake up call to everyone, including regulators, that the problem of illiquidity stretches across all asset classes, and all fund types.”
More money tied up in Ucits than Nurs
A far greater number of investors have their money tied up in Ucits funds than Nurs funds. EFAMA figures show that Ucits funds had amassed €10.4trn (£9.3trn) in assets by the end of July.
There are over 789 standalone Ucits vehicles that are authorised or recognised by the FCA to market to retail investors in the UK, over triple the number of standalone Nurs funds. On top of that there are 1,221 umbrella funds and 10,000 sub funds that are also Ucits vehicles.
“Advisers would do well to beef up comms on this now, as it could become a big complaints issue in the next bear market,” Dennehy adds.
Urgent action required
The Association of Investment Companies chief executive Ian Sayers accused the regulator of tinkering with existing rules instead of coming up with a fair solution.
“Given the recent warnings from the Bank of England regarding the systemic risks such funds create, we would also have expected a more urgent approach which addressed these broader risks and not simply tinkered with existing regulation and only apply these measures to some funds,” says Sayers.
“We hope that the further work being undertaken with the Bank of England will propose a more comprehensive and robust solution.”
Miller and her husband Alan Miller, who she co-founded wealth management firm SCM Direct with, have demanded the regulator ban all funds with daily or weekly dealing from pouring any more money into unquoted investments, including listed shares which are rarely traded, in light of the Neil Woodford saga.
She tells Portfolio Adviser the only time retail investors should be allowed to invest in funds with unquoted holdings is if they have signed a waiver that shows they have been made aware of the risks and are happy to go ahead. This should cover both Ucits and non-Ucits funds, she says.
Portfolio Adviser reached out to the FCA for comment but did not hear back in time for publication.
