FCA Warns Asset Managers to Review Liquidity Management
The FCA has warned asset managers that they need to manage liquidity effectively in order to allow investors to withdraw their investments when they expect, and at a price that accurately reflects its value. The FCA’s review focused on a number of key areas including Governance, Stress-testing, Redemptions and Valuations. Broadly firms that demonstrated good practice had a focus on liquidity management from the top of the organisation, with dedicated liquidity risk management functions that operated in line with a liquidity risk appetite. The FCA also expects firms to maintain detailed management information, and the willingness to challenge investment managers on how their portfolios meet investor redemptions. Firms are also expected to deploy a range of appropriate tools to review liquidity trends, and also conduct stress-testing for both liquidity and redemptions (including over multiple cumulative smaller redemptions).
The FCA’s review comes as investors (and firms) face a more turbulent macroeconomic environment with rising inflation and volatile markets. Asset managers should have sufficient expertise to manage liquidity, with appropriate governance arrangements to adequately respond to changing market conditions. Particularly against the backdrop of the Consumer Duty Principle, firms should manage redemptions in such a way that ensures retail customers are not treated unfairly, and that liquidity management processes allow them to achieve good financial outcomes. The systems and controls to manage liquidity should be periodically tested to ensure that they are fit for purpose, which includes appropriate scalability and execution during more stressed market conditions.
