The role of the authorised fund manager has been brought into sharp relief on more than one occasion in recent months. After the Policy Statement on NURSs, we get the terse reminder on UCITS.
By Oliver Lodge
AS you may have spotted, the industry’s regulator, the Financial Conduct Authority, is a trifle concerned about the liquidity of investment funds. Some would say that the threat to the career of its Chief Executive was good reason for the organisation to focus the minds of its many employees, and even of those beyond its Stratford bunker, on this important matter. Others might add that the risk of contagion is well demonstrated by the speculation over the position of funds invested in the infamous Woodford fund and that the recent suspension of M&G Property Portfolio fund further proved the reality of the risk. So it is that the FCA has issued to all Authorised Fund Managers (AFMs) a call to arms. And true to expectations, clearly embedded in the regulator’s missive (Effective Liquidity Management) is an early message to Independent Directors. Their honeymoon, only begun in October, is officially over.
The other reason why is also not hard to see. While any measures taken against firms, relating to the Woodford implosion, might be expected to be the message, enforcement action takes time, running the risk of another car crash before the previous one is swept up. UCITS managers must be alerted to short-comings unearthed in the course of the dig taking place at the ruins of the Woodford fund. Those who thought that all this was covered just a month ago in the Policy Statement on illiquidity in open-ended funds need to stay with the plot. That was dealing with NURSs (Non-UCITS Retail Schemes), like M&G PP; now it is time to tackle UCITS, like the Woodford Equity Income Fund.
The letter’s main point is the obvious one: that the responsibility for compliance with the fund regulations lies with the Authorised Fund Manager, the FCA-regulated firm that is the focal point of the fund’s constitution. Whomever they may have selected to work the magic on the investment portfolio, they, the AFM, are absolved of none of their responsibilities. And the Independent Directors sitting on the AFM Board would do well to remember that fact. Pleas for a review of liquidity management arrangements are peppered across the not-very-long letter, but none is more pointed than the last, saying “Please review your firm’s practices as soon as practicable to ensure you and your fellow AFM Board members are comfortable they are appropriate.” If the practices aren’t, the Board members may shortly not be either.
As if to reinforce the point repeatedly made by Andrew Bailey, the notion that regulation should be pitched at a higher level with less how-to-do-it instruction is brought to life in the letter’s emphasis on the need to ensure that the liquidity of an investment, whatever its listing, does not compromise the AFM’s ability to redeem units in the fund. Don’t lose sight of the big picture while you enjoy the exceptions, the qualifications and the encouraging guidance. But remember also that this is a coin of two sides: why commit yourselves to daily unit dealing if the fund’s strategy is longer-term investment? Attracting investors with hard-to-keep promises may end in tears all round.
For the assistance of those inclined to question what it is that FCA is really looking for, stress testing is twice stressed. Many AFMs will not have participated in this, hitherto, minority sport. The challenge is to know how far to go and what to do with the results. Bearing in mind the key phrase of assessing the impact of ‘extreme but plausible’ scenarios provides some guidance on the former. And as for the results, they should tell you at what stage you will need to ring the alarm bell, triggering your crisis management plan, but preferably the one that precedes suspension.
The letter is sent to the Chair, the warning is addressed to the whole Board.
This is an updated version of a letter first published by Thomson Reuters © Thomson Reuters, and written by Oliver Lodge, the principal consultant at OWL Regulatory Consulting.
After a decade in the investment management industry and another decade at the regulator, Mr Lodge took up the role of regulatory consultant, where he advises investment and fund managers on the ever-evolving requirements and expectations of the FCA.