Global Trustee and Fiduciary Services News and Views Issue 48

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Global Trustee and Fiduciary Services News and Views | Issue 48 | 2017 47
Enhanced disclosure
The FCA believes there is a risk that potential
liquidity issues are not, in their current form,
adequately disclosed to investors. While
information on potential liquidity issues and
how the manager can deal with such issues are
set out in the fund’s prospectus, in reality the
FCA is aware that not many investors request to
see the prospectus and some authorised fund
managers’ prospectuses are not easily available.
Annual and half-yearly reports are another
source of information, but such accounts may
be published months after the events that
caused concern.
The FCA is also concerned that presale
information for funds is not standardised (except
for UCITS). However, it is arguable that this will
be largely addressed through the introduction of
the PRIIP KIDs (at least for retail clients).7 These
documents will require the liquidity risk to be
addressed in a specific section.
While there are good arguments for enhanced
disclosure on liquidity issues, it is also worth
remembering that investors should not be
unduly put off investing in longer-term funds.
Secondary market provision
The final suggestion made by the FCA in its paper
is whether more should be done to encourage a
secondary market as an alternative redemption
route, particularly during periods of stress.
However, under normal circumstances, it is usually
straightforward to deal through a manager,
and under stressed market conditions, it is not
likely that the secondary market would offer
significantly more liquidity while it would add to
the cost and administrative burden of dealing.
Conclusion and next steps
The DP and the PRP demonstrate the continuing
regulatory interest in liquidity across the
financial sector. 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 arising
from both papers and wider global regulatory
trends (such as the developments in the US). In
particular, it may be worth considering whether
the recommendations for increasing amounts
of data (whether provided to the manager or
also available to the regulator) suggested by
the FSB is necessary or proportionate in the
UK and indeed the EU. The asset management
sector will be required to generate and share
significant amounts of additional data as a
result of MiFID II, and there is a strong argument
that regulators should make the best use of
the data they will have access to as a result of
such changes before considering whether to put
managers under further reporting obligations.
The FCA is expected to issue a response later
in the year, and it will be interesting to see the
extent to which the FCA takes on board the
industry feedback it receives. If the FCA does
consider amending its rules or guidance, it will
have to issue a consultation paper, which will be
another opportunity for industry input. IOSCO is
also due to have completed its liquidity review
and to have carried out the work requested
by the FSB by the end of 2017, so we should
expect a further paper on the topic. While many
asset managers will have dedicated significant
resources to high-profile regulatory projects such
as MiFID II and PRIIPs, time will also be required
for any changes to liquidity risk-management
policy that may require implementing.
Grania Baird
Partner
Fiona Lowrie
Knowledge Lawyer
Farrer & Co
1 FSB “Policy Recommendations to Address Structural
Vulnerabilities from Asset Management Activities,”
12 January 2017.
2 FCA DP 17/1 “Illiquid Assets and Open-Ended Investment
Funds,” February 2017.
3 As set out in FCA’s Business Plan 2017/2018: see https://www.
pdf, last downloaded on 27 April 2017. Link .
4 As a result of the Alternative Investment Fund Managers
Directive 2011/61/EU.
5 Of these 26 funds, seven were unauthorised funds chosen
because their investors included intermediaries with
substantial exposure to underlying retail customers,
highlighting the extent to which the FCA will use its
regulatory reach to protect retail investors.
6 SEC “Adopts Rules to Modernize Information Reported by
Funds, Require Liquidity Risk Management Programs and
Permit Swing Pricing,” October 2016.
7 Packaged Retail and Insurance-based Investment Products
Key Information Document (PRIIPs KID).