The Financial Conduct Authority has told asset managers to review liquidity management in their funds.

Gaps in liquidity management could lead to investor harm, the FCA has warned.

The regulator said a review had found that asset managers needed to increase their focus on liquidity risk.

Managing liquidity effectively is vital so that investors are able to withdraw their investments in line with their expectations and at an accurate price that reflects its value.

The FCA says that poor liquidity management could result in serious risks to wider market stability. 

While some firms can demonstrate very high standards, the regulator said there was a wide disparity in the quality of compliance with regulatory standards and the depth of liquidity risk management expertise.

A minority of firms in the review had inadequate frameworks to manage liquidity risk, the watchdog said today.  

The regulator found that while the building blocks and tools for effective liquidity management were usually in place at firms, these often-lacked coherence when viewed as a full process and were not always embedded into daily activities. 

Camille Blackburn, director of wholesale buy-side at the FCA, said: “We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors.

"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.

"It’s vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses.” 

The regulator added that asset managers needed to improve their liquidity management before the Consumer Duty comes into force at the end of this month.

In response, platform and SIPP provider AJ Bell said the FCA's focus on liquidity management seemed at odds with the Government strategy to push pension money into illiquid assets.

Laith Khalaf, head of investment analysis at AJ Bell, said: “It’s worth noting that at the same time the FCA is telling asset managers to manage liquidity risk, the regulator is also in the process of opening up Long Term Asset Funds investing in highly illiquid assets to retail investors.

"The initial impetus for Long Term Asset funds came from none other than Rishi Sunak, in his former role as Chancellor. The not-so-subtle goal is to tap up the large amount of money sat in pension funds for investment in UK infrastructure and start-ups, to help boost economic growth and fund the transition to greener energy.

“The Government is also reportedly considering requiring pension funds to invest a certain proportion of their money in the UK, including into some illiquid assets. We will perhaps find out more when Jeremy Hunt gives his Mansion House speech next week. The Government does seem to be focused on getting that pension money flowing into UK start-ups and infrastructure, despite the illiquid nature of these assets.

“It seems pretty clear then that the drive to get us all investing in illiquid assets is motivated by economic policy, rather than as a result of any significant consumer demand, or even because it’s actually a good idea for private investors. If it’s going to continue going down this route, the Government needs to make absolutely sure it’s not opening retail investors up to extra liquidity risks simply so it can meet its own economic targets.”