The FCA has published new rules to tighten up the use of illiquid funds in some open-ended funds.

The watchdog will also require investors to be given much clearer warnings in future when illiquid investments are used.

A number of funds have hit problems recently when investing in illiquid investments, including property funds and some other funds.

The FCA says the rule change does not specifically cover the recently-suspended LF Woodford Equity Income Fund (WEIF), a UCITS fund.

But the FCA added that it has looked at whether lessons from Woodford suspension might be learnt. It said that while the new rules were focused on NURSs rather than UCITS, the suspension of the Woodford fund “underlines the importance of effective liquidity management in open-ended funds more generally.”

The illiquid nature of the investments has recently caused difficulties when a large number of investors want to redeem their investments at the same time. Several property funds were suspended for this reason in 2016.

The Financial Conduct Authority says the new rules will  apply to ‘certain types of open-ended fund investing in inherently illiquid assets such as property.’

The new rules will affect non-UCITS retail schemes (NURSs), but will not apply to other types of fund, such as UCITS, which are already subject to restrictions relating to such assets, says the FCA.

The FCA’s new rules require that investors are provided with clear and prominent information on liquidity risks, and the circumstances in which access to their funds may be restricted. 

They place additional obligations on the managers of funds investing in inherently illiquid assets to maintain plans to manage liquidity risk.

The rules also aim to reduce the potential for some investors to gain at the expense of others, and reduce the likelihood of runs on funds leading to ‘fire sale’ of assets which disadvantage fund investors.

Christopher Woolard, executive director of strategy & competition at the FCA, said: “We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected.

“The new rules and guidance are designed to protect the interests of investors particularly during stressed market conditions.”

The new rules also include:

• Introducing a new category of ‘funds investing in inherently illiquid assets’ (FIIA).
• A requirement that NURSs investing in inherently illiquid assets must suspend dealing where the independent valuer determines there is material uncertainty regarding the value of more than 20% of the fund’s assets.
• Following feedback the FCA will, however, allow fund managers to continue to deal where they have agreed with the fund’s depositary that this is in investors’ best interests.

Chris Cummings, CEO of the Investment Association, said: “We welcome the FCA’s pragmatic and measured approach, which recognises the importance of enabling investment in illiquid assets through open-ended funds. The new rules, which combine enhanced liquidity management with additional disclosure requirements, will benefit investors, helping them make informed choices about their investments and strengthening fund management processes."