Background

On 6 June 2023, the UK’s Financial Conduct Authority (“FCA”) published the findings of its review of liquidity management in asset managers (the “Review”). The FCA also published an accompanying “Dear CEO” letter (the “Letter”).

The Review follows a letter that was sent to the Boards of Authorised Fund Managers (“AFMs”) in November 2019, detailing good practice in liquidity management. The Review allowed the FCA to see what improvements have been made since 2019 and what weaknesses remain.

Applicability

The FCA has stated that, although the Review mainly focussed on AFMs, it expects all asset managers to consider the findings for their business too.

Findings

The FCA’s key findings were as follows:

  • Coherent frameworks: Although the building blocks and tools for effective liquidity management were usually in place at firms, these lacked coherence when viewed as a full process and were not always embedded into daily activities. 
  • Appropriate prioritisation: Many firms attach insufficient weight to liquidity risk management in their governance oversight arrangements, as well as insufficient challenge and escalation, particularly in volatile environments. 
  • Varying methodologies: The FCA saw a wide range of approaches to liquidity stress testing, with some methodologies insufficient to assess actual liquidity of the portfolio, using assumptions that were not appropriately conservative. For example, some firms’ models assumed that they would always sell the most liquid assets, without ever giving regard to the liquidity of selling a ‘vertical slice’ of the portfolio.
  • Redemption arrangements: Firms typically had governance and organisational arrangements in place to meet large one-off redemptions, but did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund.
  • Applicability of tools: There were wide variations in the application of anti-dilution tools such as swing pricing, which could affect the price investors receive when redeeming.

Next steps

Although there are no new, binding regulatory obligations, the FCA has stated that it expects firms to review their liquidity management arrangements, consider the application of the Review’s findings and the Letter, and make any enhancements that may be necessary.

The FCA also expects firms to take note of the good practices highlighted in the Review, with the aim to improve consumer outcomes, particularly in light of the Consumer Duty which comes into force on 31 July 2023. 

For further information, please reach out to UKRegulatory@proskauer.com.

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Photo of John Verwey John Verwey

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients…

John Verwey is a partner in the Private Funds Group. John advises on a wide number of regulatory issues at a national UK and European level, including firm authorisations, appointed representative arrangements, change in control, market abuse. He represents a variety of clients that range from small start-up fund managers to established global fund advisers and managers.

A particular area of focus for John is Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II).  This includes advising on pre-marketing and marketing strategies for fund managers, advising on the Level One and Lever Two requirements under AIFMD and implementing UK rules and legislation, and advising on the organizational and conduct of business requirements under MiFID II.

Photo of Amar Unadkat Amar Unadkat

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients…

Amar Unadkat is a special regulatory counsel in the Corporate Department and a member of the Private Funds Group.

Amar advises on a variety of financial services regulatory and compliance matters both from a UK and European perspective. Amar regularly advises his clients on issues relating to the Alternative Investment Fund Managers Directive (“AIFMD”), the second Markets in Financial Instruments Directive (“MiFID II”), as well as the latest ESG developments. Amar also focusses on UK regulatory compliance matters, including the FCA’s change of control regime, the appointed representative regime and the Senior Managers & Certification Regime.

Amar’s clients include private equity firms, investment managers and advisers, firms in the FinTech space, wealth management businesses, banks and sovereign wealth funds.

Photo of Sulaiman Malik Sulaiman Malik

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers…

Sulaiman Malik is an associate in the Corporate Department and a member of the Private Funds Group.

Sulaiman advises clients on a range of UK and international financial regulation. He advises private equity funds, hedge funds, sovereign wealth funds and other asset managers, as well as banks, FinTechs, broker-dealers and governments.

Prior to joining Proskauer, Sulaiman trained at Simmons & Simmons in London, where he was seconded to Brevan Howard. He has also spent time at the UK’s Ministry of Justice and as an adviser to the Mayor of Brisbane, in Australia.

Sulaiman is a passionate advocate for diversity and inclusion. He previously worked at Rare, a market-leading diversity consultancy, and provides pro bono legal advice to a range of community and civil rights organizations.

Photo of Michael Singh Michael Singh

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms…

Michael is an associate in the Private Funds Group in the Corporate Department.

Michael advises clients on a variety of regulatory issues both from a UK and European perspective. He also helps clients on fund related transactions. His clients include private equity firms, investment managers, FinTech companies and wealth management businesses.

He is dual-qualified as a German lawyer (“Rechtsanwalt”) and Solicitor of England and Wales and previously was in-house counsel at Deutsche Bank.