On February 8, 2017, the FCA published a Discussion Paper on open-ended investment funds investing in illiquid assets. The FCA is seeking feedback on whether its rules and regulatory approach to open-ended funds that hold illiquid assets are appropriate. The paper considers some of the risks that may arise when investors use open-ended investment funds to gain exposure to illiquid assets such as land, buildings, infrastructure and unlisted securities. The FCA is concerned that fund managers that manage funds that hold illiquid assets may face challenges when investors want to withdraw their funds quickly and at short notice. These include achieving realistic valuations of the underlying assets, and whether the need to accept increased redemption requests might lead a manager to favor exiting investors over those that wish to keep their money in the fund, particularly under stressed conditions. The results of the UK's referendum on whether to leave the EU led to uncertainty in the financial markets and open-ended funds had to work out how to value their property portfolios accurately and how to manage a significant increase in redemptions. The FCA paper describes the liquidity management issues experienced by certain UK property funds and how the FCA responded to those issues, describes the current UK regulations that apply to funds investing in illiquid funds and makes suggestions for possible approaches to the regulation of liquidity.

The FCA has requested feedback on the points raised by May 8, 2017. Once it has assessed the responses, the FCA will decide whether it needs to amend its rules or policy approach. If changes are required, the FCA will publish a consultation paper setting out its proposals.

The Discussion Paper is available at: https://www.fca.org.uk/publication/discussion/dp17-01.pdf .

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