Fund managers are failing to provide appropriate liquidity management with many demonstrating a lack of care to investors. Gill Wadsworth talks to Patric Foley-Brickley, Managing Director, Apex FundRock UK, about how the industry can raise standards.
This July the UK’s Financial Conduct Authority (FCA) published a damning assessment of asset managers’ liquidity management frameworks. The multi-firm review reports that with “few exceptions” many firms fell short of the regulator’s expectations and “did not attach sufficient weight to managing liquidity in their frameworks and governance structures”.
In most cases, liquidity risks were flagged only on an exceptions basis, “resulting in committees discussing liquidity issues in isolation, where a wider context would be of benefit”.
The FCA also found “little evidence of focus on the composition and evolution of less liquid buckets within funds”, noting that some firms did not have processes in place to accelerate governance in times of stress.
And while some fund managers were found to have sophisticated stress-testing, others were accused of merely carrying out “unsatisfactory box-ticking exercises”.
The criticism of asset managers continued with participants in the review reported to have inadequate redemption processes that failed to ensure investors were treated fairly, particularly in a stressed scenario.
Patric Foley-Brickley, Managing Director, Apex FundRock UK, says: “The key takeaway [from the FCA’s review] is that many firms will have to undertake significant additional work to demonstrate they are managing fund liquidity effectively to protect the best interests of investors. The FCA is likely to scrutinise fund liquidity management arrangements just as closely going forward and demonstrating the development, testing and implementation of robust liquidity management arrangements will also be essential for firms to show commitment to ensuring good customer outcomes under the forthcoming Consumer Duty standards.”
Liquidity has been on the financial watchdog’s radar since 2019 following several scandals including the collapse of the Woodford Equity Income Fund (WEIF) which promised investors daily liquidity but was found to be invested in a number of unlisted companies. When investors, who had lost faith in manager Neil Woodford came to withdraw their funds, WEIF’s illiquid allocations became clear, the fund was suspended and thousands of investors were left out of pocket.
Foley-Brickley says liquidity will remain firmly on the FCA’s agenda as the current economic conditions continue to “spook” investors.
“While there are signs emerging that inflation may have peaked, central banks nevertheless remain cautious and interest rates continue to rise. Market volatility and these rising interest rates continue to spook investors, leading to greater redemptions being sought. This is a growing concern, with the cost of living making crisis many people rebalance their portfolios, seeking greater liquidity in their investments by moving money into lower-risk, interest rate pegged savings vehicles that have suddenly become more attractive.” he says.
Foley-Brickley predicts a significant rise in the number of asset managers outsourcing their liquidity management in a bid to stay on the right side of the regulator, a suggestion the FCA makes in its review.
He says he has already seen increased interest from fund managers in appointing third party liquidity management specialists and adds: “The expectations of the FCA in regard to liquidity management practices are clear, and by choosing the right service provider, AFMs can be confident that they are meeting these expectations in a timely and diligent manner.
