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The UK Financial Conduct Authority on Thursday said warned asset managers must control their liquidity levels better as a failure to do so could bring ‘serious risks for investors and to wider market stability’.
The watchdog called on asset managers to ‘review liquidity management in funds’.
‘As things stand, gaps observed in liquidity management could lead to a risk of investor harm,’ the FCA said.
‘While some firms demonstrated very high standards, with the review highlighting good practices seen, there was a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise.’
An FCA review found that the building blocks and tools for effective liquidity management were ‘usually’ in place at firms, but lacked ‘coherence’ when viewed as a full process and were not always embedded into daily activities.
While firms typically had governance and organisational arrangements in place to meet large one-off redemptions, the FCA said they did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund.
The regulatory body also noted that there was a wide range of approaches to liquidity stress testing, with some methodologies ‘insufficient’ to assess the actual liquidity of the portfolio. The approaches also used assumptions that were ‘not appropriately conservative’.
‘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,’ said Camille Blackburn, director of Wholesale Buy-Side at the FCA.
‘It’s vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses.’
The FCA warned asset managers should take account of its findings, as many of the examples of good practice highlighted in the review are consistent with the new Consumer Duty, which comes into force on July 31.
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