48 / 64
Markets and Securities Services |
United Kingdom
46
Asset valuation and anti-dilution measures
FCA rules and guidance do not currently deal with
FVP for non-financial assets, such as real property,
in any detail, so the FCA is considering whether
further guidance in this area would be helpful.
This could be especially useful for fund managers
in times of stress when applying discounts to the
redemption price of units in a fund.
However, the FCA also acknowledges that
such circumstances call for finely balanced
judgement by the manager. One needs to avoid
“punishing” an investor who wants to leave the
fund. On the other hand, early leavers may still
benefit from first-mover advantage should a
fund subsequently be suspended as they would
have already redeemed their units.
While FVP guidance could be helpful, any such
guidance will need to be carefully considered
to ensure that it does not cause unintended
consequences.
redemption in scheme documents so that they
can be used in exceptional circumstances. There is
currently little guidance on these powers and the
Investment Association in the UK is working with
fund managers to ascertain what rule changes
and additional guidance would be helpful.
The FCA is also looking at redemption frequency
and the use of notice periods, considering, for
example, introducing rules to prevent funds
with illiquid assets offering frequent redemption
points. This approach could be helpful for
managers of funds investing in illiquid assets,
but it is quite a significant change for retail
authorised funds where the use of notice periods
is very rare and investors are used to being able
to access their money quickly. Furthermore,
requiring funds to have fewer dealing points
has its own issues, as by reducing redemption
points, multiple orders may need to be dealt
with in a very short time span, which can
create difficulties for the manager, although
the FCA notes that there are some operational
solutions to this (for example, by using a queuing
or pooling system). In addition, as the FCA
acknowledges, to be eligible for inclusion in an
Individual Savings Account, there needs to be at
least fortnightly redemptions, which is another
issue to be considered.
Direct intervention by the FCA
The FCA already has extensive powers to
intervene in the activities of authorised firms,
including requesting such firms to take specific
actions such as suspend dealing. The FCA did
not use these powers in the aftermath of the
2016 referendum because it did not think it
was warranted. While certain fund managers
did decide to suspend dealing at that time,
the FCA believes this indicates that the
market was continuing to function in an orderly
manner and did not require its intervention.
However, the FCA is aware that there could be
instances when a manager might be reluctant
to be the first to suspend dealing (for
reputational reasons, perhaps).
Unless the feedback suggests otherwise, the
FCA appears to be reluctant to increase its use
of direct intervention powers, as it considers
there are significant risks associated with such
actions. While an individual fund manager
deciding to suspend dealing may be considered
indicative of an orderly functioning market, a
wider intervention by the regulator could result
in the sort of financial panic the regulator is
trying to avoid.
Deferring and limiting redemptions
Many funds investing in illiquid assets include
provisions in their documentation allowing
the manager to defer redemptions where a
redemption request is classed as a “large”
deal (10% of the size of the fund, for example).
However, currently the FCA rules only allow
NURS redemptions to be deferred until the next
valuation point, and it is not clear whether this
can be done on a rolling basis, which in the case
of a daily dealing fund is not particularly helpful.
The FCA is also considering whether to require
managers to include powers such as deferred
The timing of the FSB’s PRP
and the FCA’s DP is helpful
to the industry insofar as
the FCA is clearly asking
for wide-ranging input from
the industry and allowing
for feedback on any points
of concern and wider global
regulatory trends.