The Financial Conduct Authority (FCA) has unveiled a significant proposal aimed at overhauling liquidity management within UK funds that hold assets like commercial property and infrastructure, introducing a mandatory 90-day notice period for investor withdrawals. This move, detailed in a consultation that closes on December 11, 2026, seeks to bolster investor confidence and market stability by aligning withdrawal mechanisms with the inherent illiquidity of these asset classes. The proposed rules are designed to bring greater transparency to fund structures and prevent the kind of market disruptions that have been seen in recent years when a rush of redemptions has forced fund managers to sell assets at fire-sale prices.
Addressing the Illiquidity Challenge
The core of the FCA’s proposal centres on requiring investors to provide a minimum of 90 days’ notice before withdrawing capital from funds invested in "inherently illiquid assets." This category, as defined by the regulator, encompasses investments that cannot typically be sold swiftly without incurring a substantial loss in value, such as commercial real estate and infrastructure projects. Currently, some funds holding such assets offer daily dealing, a structure that, according to the FCA, can create significant pressure when multiple investors attempt to exit simultaneously.
This mismatch between the liquidity offered to investors and the underlying asset’s trading characteristics has proven problematic. When faced with a wave of redemption requests, fund managers may find themselves without sufficient cash reserves. This can lead to a difficult choice: either suspend redemptions altogether, leaving investors unable to access their money, or be forced to rapidly sell off assets. Such forced sales often occur at depressed prices, negatively impacting the value of remaining investors’ holdings and potentially creating ripple effects across the broader market.
The proposed 90-day notice period is intended to provide fund managers with the crucial breathing room needed to manage redemptions in a more orderly fashion. By allowing more time to identify buyers and negotiate sales at fair market values, the FCA aims to reduce the likelihood of liquidity-related suspensions and mitigate the risk of fire sales. This proactive approach is seen as a vital step in safeguarding both individual investors and the overall health of the financial markets.
Background and Context: A History of Liquidity Strains
The FCA’s proposed reforms are not emerging in a vacuum. The UK financial sector, like its global counterparts, has experienced periods of significant liquidity stress in funds holding less liquid assets. A notable example was the widespread suspension of redemptions from commercial property funds in the aftermath of the Brexit vote in 2016, when uncertainty surrounding the UK’s future economic relationship with the European Union triggered a surge in investor outflows. More recently, during the COVID-19 pandemic, similar pressures were observed across various asset classes as investors sought to shore up their cash positions.
These events highlighted a fundamental tension in fund management: the expectation of daily liquidity for retail investors versus the reality of holding assets that can take months or even years to sell. The FCA’s current consultation is a direct response to these challenges, aiming to preempt future crises by establishing clearer and more robust liquidity management frameworks. The regulator’s stated goal is to ensure that investors fully understand the terms and conditions of their investments before committing capital, thereby fostering a more resilient and transparent market.
Alignment with International Standards
A key driver behind the FCA’s proposed changes is the desire to bring the UK’s regulatory framework into alignment with evolving international liquidity standards for open-ended funds. Global regulators have been increasingly scrutinising liquidity management practices, particularly in light of the vulnerabilities exposed by recent market shocks. By adopting measures similar to those being implemented or considered in other major financial jurisdictions, the UK aims to maintain its standing as a competitive and trusted financial centre while enhancing its regulatory robustness.
This international harmonisation is crucial for cross-border investment flows and for ensuring a level playing field for fund managers operating in multiple markets. It signals a global recognition of the need for more sophisticated approaches to managing liquidity in portfolios that include a significant allocation to private markets.
Consultation Process and Timeline
The FCA has opened a formal consultation period, inviting industry participants and stakeholders to provide feedback on its proposals. The deadline for submitting responses is December 11, 2026. This extensive consultation period allows for thorough deliberation and ensures that the final rules are well-informed and practical.
For existing funds, the FCA has proposed a two-year transition period to comply with the new requirements. Furthermore, these funds would be obligated to provide investors with at least one year’s advance notice of any changes to withdrawal terms. This phased implementation is designed to give fund managers ample time to adjust their operational processes and to communicate effectively with their investor base.
Official Statements and Rationale
Michelle Beck, Markets Director at the FCA, articulated the regulator’s stance, 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 dual objective: enhancing clarity for investors and bolstering market confidence.
The regulator’s rationale is rooted in the principle of investor protection and market integrity. By making withdrawal arrangements more transparent and aligning them with the underlying asset’s characteristics, the FCA aims to prevent investors from being misled about the liquidity of their investments. This, in turn, is expected to foster greater confidence in funds that invest in private-market assets, encouraging long-term capital allocation and supporting the financing of essential infrastructure and commercial projects.
Potential Implications and Analysis
The proposed liquidity reforms are poised to have a significant impact on the UK’s fund management industry, particularly for those specialising in property and infrastructure.
For Investors:
- Enhanced Transparency: Investors will have a clearer understanding of how and when they can access their capital, reducing the risk of unexpected liquidity constraints.
- Longer-Term Investment Horizon: The 90-day notice period will naturally encourage a longer-term investment perspective for these asset classes, aligning with their illiquid nature.
- Potential for Reduced Volatility: By mitigating the risk of forced asset sales, the reforms could lead to more stable fund performance, as extreme price volatility driven by liquidity shocks may be reduced.
For Fund Managers:
- Operational Adjustments: Fund managers will need to adapt their systems and processes to accommodate the notice period, including communication strategies for investors.
- Strategic Planning: The reforms may influence product development, with a potential shift towards structures that are more explicitly designed for long-term, illiquid holdings.
- Enhanced Reputation: Adherence to robust liquidity management practices can enhance a fund manager’s reputation for stability and reliability.
For the Wider Market:
- Increased Stability: By reducing the potential for systemic risk arising from liquidity crises in significant asset classes, the reforms are expected to contribute to overall market stability.
- Support for Real Economy Investment: A more stable and confident investment environment for property and infrastructure funds can facilitate greater capital flows into these sectors, which are crucial for economic growth and development.
- Competitive Landscape: The alignment with international standards will help maintain the UK’s competitiveness in global financial markets.
The Role of NURS
The consultation specifically targets authorised fund managers of non-UCITS retail schemes, commonly known as NURS. These schemes are designed for retail investors and often hold a diverse range of assets, including those that are less liquid. The FCA’s focus on NURS reflects a commitment to ensuring that retail investors are adequately protected when investing in products that may not offer immediate access to their capital.
Future Outlook
The FCA’s proposal marks a significant step towards a more robust and transparent regulatory framework for funds holding illiquid assets. The success of these reforms will depend on the quality of feedback received during the consultation period and the FCA’s ability to implement the rules effectively. As the industry adapts, the expectation is that the UK market will become more resilient, investor confidence will be strengthened, and the financing of crucial real assets will be placed on a more stable footing. The ongoing dialogue between regulators and industry stakeholders will be critical in shaping the future of liquidity management in the UK’s dynamic financial landscape.
