In the Topics for Discussion section of a consultation paper on the implementation of UCITS V issued yesterday, the FCA said it recognises that there may be benefits from a liquidity management perspective to allowing fund managers to restrict inflows to a fund at fairly short notice.
Acknowledging that there are many ways in which this is currently done, all of which fall under the poorly defined term ‘soft closure’, the FCA said it had been approached by a number of managers and trade bodies to consider the issue because, currently, managers that want to introduce limited issue to an existing fund must first get FCA approval and need to change the relevant prospectus before they can do so.
Arguing that large or sudden inflows, especially in times of poor market liquidity could compromise an investment manager’s ability to invest at a scale or strategy that would be adequate to maintain the performance of the fund.
“In such circumstances, the ability to restrict inflows to the fund quickly could be very beneficial in not exposing the fund to new risks,” The FCA said.
For the purposes of the document, the FCA defined ‘soft closure’ as “the temporary restriction, by an authorised fund manager, of the issue of units/shares in a fund to unitholders”.
The FCA said it is keen to examine the potential risks to investors and the distribution model of changing the rule because, it said: “Closure to new investment at short notice could create problems, given that many investors use both financial advisers and intermediaries (such as platform service providers), who need to be aware of the AFM’s intentions so they, in turn, can stop accepting new investments.”
As a result, it has issued a call for comment on the following two questions:
What would be the practical benefits and risks, for firms and investors, of changing the limited issue rule?
What specific changes, if any, do you think would strike the best balance between the interests of the manager, existing investors and prospective new investors?
It added: “We also wish to look at the benefits and risks of other options that might be attractive to AFMs, such as allowing existing regular savings investments to continue while closing to new lump-sum investments.”
