The FCA says it may change its rules on authorised funds holding illiquid assets to protect retail investors.

The regulator said that restrictions or ‘notice periods’ may be placed on cashing in funds using illiquid investments to safeguard all investors. 

A 3 month notice period on cashing in such funds could be introduced and daily dealing in funds could be moved to much lower frequency, such as fortnightly, although this could affect ISA eligibility under HMRC rules. Pricing rules could also change.

In its review of Patient Capital and Authorised Funds published today the regulator said: “We are currently exploring in our work with the FPC what other liquidity management tools, such as notice periods and pricing adjustments, could be introduced to help funds manage their liquidity in ways which avoid systemic risk and detriment to their investors.

“This will likely include discussions with distributors about the operational implications of any such changes where authorised retail funds use platform providers. Any proposals for change that arise from this work would be subject to public consultation in the usual way.”

The use of illiquid assets which could not be sold quickly to meet redemptions was blamed in large part for the downfall of Woodford funds and has also caused problems for other fund managers, including those running property funds. The problems with Woodford funds are referred to in the report.

The FCA says that the use of illiquid assets and investing in long term assets is not necessarily harmful to investors but many investors may not understand the problems they face when they want to cash in quickly.

The FCA publishes its comments in FS20/2: Patient Capital and Authorised Funds today.

It summarises responses to DP18/10 on whether there are “unnecessary barriers” to investing in patient capital through authorised funds.

Patient capital mainly refers to long term investing in capital-intensive projects, such as infrastructure.

The FCA said it has not found any “significant barriers” to investing in patient capital assets for professional investors but has found “some barriers” for retail investors. However, it has not found barriers which are unnecessary or could be relaxed without introducing a degree of risk that is “inappropriate” for retail investors.

It also noted that other investment products, such as investment trusts and VCTs, provide alternative ways for retail investors to access long-term investments.

The FCA gave a cautious welcome to proposals from the Investment Association for Long Term Asset Funds which could be sold to retail investors. However it says more work is needed before any rule change could be considered to allow them.