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Dear Chair | Release Date: 4th November 2019

To read a longer summary of this Dear Chair letter, click here.

To access the original FCA document, click here.

Short Summary

The FCA has issued a directive to Authorised Fund Managers (AFMs), emphasising the critical importance of effective liquidity management within funds. This responsibility persists even if investment management is delegated. The FCA has highlighted that poor liquidity management, especially in daily dealing funds which dominate the UK retail market, could significantly harm consumers if not managed properly.

On 30 September 2019, the FCA published a policy statement (PS19/24) focusing on illiquid assets and open-ended funds. This policy includes new regulations designed to enhance liquidity management, such as mandating temporary suspension of dealing under certain conditions and improving disclosure to customers. These rules will be implemented in September 2020, but the FCA advised fund managers to begin integrating improved liquidity management practices sooner if possible.

Fund managers are urged to reassess their portfolios to ensure compliance with existing liquidity, asset eligibility, and portfolio composition requirements. They must also guarantee robust valuation practices, particularly for less liquid assets, to maintain the integrity and stability of their funds.

Additionally, AFMs are reminded to have in place effective systems, controls, and governance to manage liquidity risks properly. This includes conducting regular liquidity assessments, using liquidity buckets for risk management, stress testing, and ensuring an independent risk function is in place to monitor and report any concerns.

Key Take-aways and Actions:

AFMs should thoroughly review and, if necessary, enhance their liquidity management frameworks to comply with both existing and forthcoming regulations. This includes being prepared for potential market stress by implementing liquidity thresholds and considering suspension triggers thoughtfully. The aim is to ensure funds are managed responsibly and can meet redemption requests without compromising the fund’s stability or investors’ interests.

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