The Financial Conduct Authority (FCA) has put forth significant new liquidity rules for UK funds investing in assets such as commercial property and infrastructure, proposing a mandatory 90-day notice period for investors seeking to withdraw their capital. This move aims to enhance transparency, bolster investor confidence, and mitigate systemic risks associated with illiquid asset classes. The consultation period for these proposed measures is currently open, with responses due by December 11, 2026.
Addressing the Liquidity Mismatch in Illiquid Asset Funds
The core of the FCA’s proposal addresses a fundamental challenge in funds that invest in assets like commercial property and infrastructure: the mismatch between the liquidity offered to investors and the inherent illiquidity of the underlying assets. Currently, some funds holding investments that are difficult to sell quickly without incurring significant losses offer daily dealing to investors. This means investors can request to withdraw their money on any given day, often with no advance notice requirement.
This structure, while attractive to investors seeking flexibility, can create considerable pressure when a large number of investors decide to exit their holdings simultaneously. If a fund manager does not have sufficient cash reserves on hand to meet these redemption requests, they may be forced into a difficult position: either halting withdrawals altogether, which can erode investor confidence and lead to reputational damage, or selling assets rapidly.
The FCA’s analysis indicates that such rapid asset disposals can have detrimental consequences. Fire sales can depress asset prices, negatively impacting the value of investments for those investors who choose to remain in the fund. Furthermore, widespread forced selling of illiquid assets can transmit strain across the wider financial market, potentially triggering broader liquidity crises.
The proposed 90-day notice period is designed to act as a crucial buffer. It would provide fund managers with significantly more time to manage redemption requests in an orderly fashion. This extended timeframe would allow them to strategically sell underlying assets, potentially securing better prices and avoiding the detrimental effects of distressed sales. By facilitating a more measured approach to divestment, the FCA anticipates a substantial reduction in the risk of liquidity-related suspensions, thereby offering greater stability and predictability for both investors and the market.
Background and Context: The Growing Appeal of Private Markets
The FCA’s proposed regulations arrive at a time when investor interest in private markets, including property and infrastructure, has been steadily growing. These asset classes have traditionally been seen as offering attractive diversification benefits, potentially higher returns, and a hedge against inflation compared to traditional public markets. Institutional investors, pension funds, and increasingly, retail investors through pooled funds, have allocated significant capital to these sectors.
However, the inherent characteristics of these investments – their long-term nature, substantial capital requirements, and the complexities of valuation and sale – necessitate a liquidity profile that often differs from more liquid public securities. The period leading up to these proposals has seen several instances, both internationally and within the UK, where funds holding illiquid assets have faced liquidity strains. These events have highlighted the need for regulatory intervention to ensure that investor expectations are aligned with the realities of investing in these asset classes.
The FCA’s initiative is part of a broader global trend towards enhancing liquidity management frameworks for open-ended funds, particularly those investing in less liquid assets. Regulators worldwide are grappling with similar challenges and are seeking to implement measures that promote market stability and investor protection.
Key Provisions of the Proposed Rules
The proposed rules primarily target authorised fund managers of non-UCITS retail schemes (NURS). These are types of investment funds authorized in the UK that are not eligible for the Undertakings for Collective Investment in Transferable Securities (UCITS) framework, often because they invest in a wider range of asset classes, including property and infrastructure.
The FCA has explicitly classified assets that typically cannot be sold swiftly without a material loss in value as "inherently illiquid assets." This category encompasses a range of investments, including but not limited to commercial property, private equity, private debt, and infrastructure projects.
Under the proposed framework, investors would be required to provide a minimum of 90 days’ notice before requesting the withdrawal of their capital from affected funds. This notice period is intended to be a baseline, and the FCA has indicated that fund managers may impose a longer notice period if the specific nature of the fund’s portfolio or investment strategy warrants it. For instance, a fund with exceptionally long-term or complex holdings might require a notice period exceeding 90 days.
For existing funds that currently do not have such notice periods in place, the FCA has outlined a transition period. These funds would be given two years to comply with the new requirements. Crucially, they would also be obligated to provide their investors with at least one year’s advance notice of these changes to withdrawal arrangements. This phased implementation aims to allow existing investors sufficient time to understand the implications and make informed decisions about their investments.
Alignment with International Standards and Investor Confidence
A significant driver behind the FCA’s proposals is the desire to bring the UK’s regulatory framework for fund liquidity into alignment with emerging international standards. Global bodies, such as the International Organization of Securities Commissions (IOSCO), have been actively working on developing best practices and recommendations for liquidity risk management in investment funds. By adopting these proposed rules, the UK aims to maintain its position as a leading global financial center and ensure that its regulatory environment remains robust and competitive.
The FCA’s stated objective for these measures is to make withdrawal arrangements more transparent and predictable before investors commit their capital. This enhanced clarity is expected to foster greater confidence in funds that allocate capital to private-market assets. When investors understand the terms and conditions under which they can redeem their investments, especially in relation to the underlying asset’s liquidity, they can make more informed investment decisions. This, in turn, is anticipated to lead to more stable fund flows and reduce the likelihood of panicked reactions during market stress.
Michelle Beck, FCA Markets Director, articulated the regulator’s rationale, stating, "Funds should be clear about whether they offer quick access or are built for longer-term investments like property. Our rules will help firms make that clearer and give the market more confidence to invest." This statement underscores the FCA’s focus on improving the clarity of fund structures and reinforcing investor trust.
Broader Implications and Analysis
The introduction of these liquidity rules has several potential implications for the UK’s asset management industry and investors.
For Fund Managers:
- Operational Adjustments: Fund managers will need to adapt their operational processes to accommodate the notice periods. This includes developing robust systems for tracking redemption requests, managing communication with investors regarding notice periods, and enhancing their liquidity forecasting capabilities.
- Product Design: The rules may influence the design of new funds investing in illiquid assets. Managers might proactively incorporate longer notice periods or other liquidity management tools from the outset to comply with regulations and manage investor expectations effectively.
- Investor Relations: Enhanced transparency will be paramount. Fund managers will need to clearly communicate the liquidity characteristics of their funds in marketing materials, prospectuses, and ongoing investor communications.
For Investors:
- Reduced Flexibility: The most immediate impact for investors will be a reduction in the immediate liquidity of their capital in affected funds. Investors seeking very short-term access to their money may need to reconsider investing in these types of funds or seek alternative investment vehicles.
- Potential for Better Returns: By mitigating the risks associated with liquidity crises and fire sales, the proposed rules could contribute to more stable long-term performance and potentially better risk-adjusted returns for investors who are comfortable with the longer-term nature of property and infrastructure investments.
- Informed Decision-Making: The increased transparency mandated by the FCA should empower investors to make more informed choices, aligning their investment horizons with the liquidity profile of the funds they invest in.
For the Market:
- Reduced Systemic Risk: The primary benefit for the broader market is the potential reduction of systemic risk. By preventing a cascade of forced asset sales during periods of stress, the rules aim to create a more resilient financial system.
- Enhanced Market Stability: A more orderly redemption process for illiquid assets can contribute to greater overall market stability, reducing the volatility that can arise from liquidity dislocations.
- Attracting Long-Term Capital: The clearer regulatory framework could make the UK an even more attractive destination for long-term patient capital, as investors gain greater confidence in the stability and transparency of the funds available.
The Consultation Process and Next Steps
The FCA has initiated a formal consultation process to gather feedback on its proposed liquidity rules. This is a critical stage where industry participants, including asset managers, investor associations, and other stakeholders, have the opportunity to voice their opinions, raise concerns, and suggest modifications. The deadline for submitting responses is December 11, 2026.
Following the closure of the consultation, the FCA will review all feedback received. This review process will inform the finalization of the rules, which may include amendments based on the input gathered. The FCA will then publish its feedback statement and the final regulatory requirements.
The proposed timeline indicates that the FCA is taking a deliberate approach, allowing ample time for thorough consideration and engagement. The two-year compliance period for existing funds further underscores this measured approach.
The FCA’s proposed reforms represent a significant step towards ensuring the long-term stability and integrity of the UK’s investment fund market, particularly in sectors where liquidity is a paramount concern. By fostering greater clarity and imposing stricter liquidity management requirements, the regulator aims to protect investors and bolster confidence in the UK’s financial landscape.
