U.K.’s FCA seeks comment on illiquid investments

The Financial Conduct Authority is seeking comment on illiquid investments through open-end strategies and the challenges posed to money managers and investors.

The U.K.’s financial watchdog said illiquid assets cover real estate, infrastructure and other assets such as private equity.

The FCA issued a consultation paper Wednesday requesting the comment period.

The paper, which the FCA said is relevant to institutional investors and money managers running illiquid open-end strategies, acknowledged the potential strong investment returns and diversification from illiquid assets.

The FCA wants to review its regulatory approach to open-end strategies investing in illiquid assets, and wants “to gather more evidence to decide whether more (or different) rules and guidance are needed to support market stability and protect consumers, without preventing them from having access to a diversified range of investment opportunities,” the paper said.

The FCA is looking for comment on existing problems in open-end illiquid strategies, how well the current rules address those problems, and what further regulatory intervention might be necessary.

As part of its paper, the FCA published a number of potential policy approaches it could use to intervene, relating to the treatment of professional investors, portfolio structure, valuation of assets, the use of specific tools, direct intervention by the regulator, enhanced disclosure and secondary markets.

One suggestion related to investors in these strategies is to consider whether to prevent the investment of both retail and institutional money in the same strategy. “However, this would require significant restructuring of existing funds which might realize the negative results we want to avoid,” the paper said.

“This discussion paper is a great opportunity for all stakeholders to think carefully about the management of risk, particularly around redemptions, if investors are looking for a quick exit,” said Megan Butler, executive director of supervision–investment, wholesale and specialist at the FCA, in a statement accompanying the paper. “We want to engage with fund managers and the investors whose money they manage to understand what problems they think exist. Specifically, in the context of open-ended funds we want people to consider how well the current rules address those problems, and what further regulatory intervention might be needed. We look forward to industry and consumers giving us their views and opinions.”

The deadline for comment is May 8. The FCA will then use responses and further supervisory work to decide whether it needs to propose any changes.

The paper is available on the FCA’s website.