In an effort to boost retail investor protection, the U.K.’s Financial Conduct Authority (FCA) is adopting new rules and guidance that aim to enhance liquidity risk management by retail investment funds.
Following a consultation on a set of proposed changes to the existing rules for liquidity risk management, the FCA is finalizing its reforms that aim to beef up the requirements for fund managers to assess ongoing liquidity risk in certain securities, promote fund managers’ use of anti-dilution tools, and adopt new guidance on liquidity stress testing.
“Beyond the calibration of anti-dilution tools, our guidance makes clear that firms must embed strong governance, oversight and challenge by senior management across their liquidity risk management more broadly, including regular review of how these tools are used and calibrated in practice,” the FCA said in a policy statement on Thursday.
Additionally, the regulator stressed that fund managers must ensure that the use of anti-dilution tools is in the best interests of all unitholders.
The reforms come in the wake of investor protection concerns about liquidity risk in open-ended investment funds, which led to revised policy recommendations from the International Organization of Securities Commissions and Financial Stability Board.
“We want retail investors to continue accessing a broad range of investment opportunities with appropriate protection in place from risks that can arise where funds invest in less liquid assets,” the FCA said.
The new rules and guidance are slated to take effect on Feb. 1 2027, although firms will have until Aug. 1 to implement certain provisions, such as updating fund prospectuses.
Looking ahead, the FCA said it’ll also be consulting separately on proposals for retail funds that are invested in inherently illiquid assets, such as real estate funds.