The Financial Conduct Authority wants money managers operating in the U.K. to sharpen their focus on liquidity risk in their strategies.
A review by the financial services watchdog found that poor liquidity management could harm investors and lead to market instability.
The FCA wants firms to manage liquidity risk more effectively so that investors can withdraw their investments as required and at an accurate price and value.
There was a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise among firms, the FCA said in a news release following its latest review. A minority of firms in the review had inadequate frameworks in place to manage liquidity risk, it added.
The FCA's review found that many firms attach insufficient weight to liquidity risk management in their governance oversight arrangements, particularly in volatile environments.
Firms typically had governance and organizational arrangements in place to meet large one-off redemptions but did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on strategies.
The FCA also found that firms' risk methodologies were insufficient to assess the actual liquidity of portfolios.
"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 amongst the minority with serious gaps in managing liquidity risk," Camille Blackburn, director of wholesale buyside at the FCA, said in a news release.