Following a review of liquidity management in the asset management sector, the U.K.’s Financial Conduct Authority (FCA) is sounding the alarm and calling on industry firms to address weaknesses.
The FCA found most of the asset managers it reviewed have weaknesses in their liquidity risk management arrangements — the ability to meet the demand for investment fund redemptions, particularly in periods of market stress.
The review found “a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise,” including firms that have “inadequate frameworks to manage liquidity risk.”
For instance, it found that firms typically had liquidity management tools in place, but that they often “lacked coherence” and weren’t always embedded in their daily routines.
Additionally, the regulator found that many firms don’t put sufficient emphasis on liquidity risk management in their governance oversight arrangements, and that some firms’ liquidity stress testing methodologies aren’t adequate to assess the actual liquidity of their portfolios.
While firms typically had procedures in place to meet large one-off redemptions, they often didn’t have sufficient arrangements to deal with market-wide redemptions that could have a significant impact on a fund.
“We have seen examples in the market where liquidity risk has crystallized and the impact this can have on investors,” said Camille Blackburn, director of wholesale buy-side at the FCA, in a release. “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.”
In a letter to the industry, the FCA called on asset managers to review its findings and address any shortcomings in their own liquidity management practices — and to ensure that they are compliant with the new consumer duty that comes into force on July 31.
“It’s vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses,” Blackburn added.
The review comes in the wake of efforts from the Financial Stability Board (FSB) and the International Organization of Securities Commissions to beef up policies around fund liquidity management.
At this point, the FCA isn’t proposing any rule changes, but it may introduce future reforms to liquidity management rules and guidance to “be consistent with updated global standards,” it said.