On 9 December the FCA published the consultation paper CP25/38: Enhancing fund liquidity risk management. This is relates to the liquidity risk management of UK UCITS and NURS. The FCA will be consulting separately in 2026 on the liquidity risk management for AIFs. That consultation will include revised proposals to address the liquidity mismatch in some authorised AIFs invested in inherently illiquid assets, such as authorised property funds.
The proposals in CP25/38 seek to implement the revised IOSCO Liquidity Risk Management Recommendations for Collective Investment Schemes. The FCA considers that the current liquidity risk management framework set out in the FCA Handbook is robust. Therefore they do not propose any fundamental changes, but have proposed some specific areas where rules can be enhanced or additional guidance provided.
The FCA's proposals aim to:
- Promote effective use of anti-dilution tools (such as swing pricing) by AFMs of UCITS schemes and NURS. This would help prevent the value of investors’ investments being diluted over time due to bearing the costs of other investors entering and exiting the fund.
- Ensure that AFMs of UCITS schemes and NURS have robust liquidity risk management processes, especially where they have exposure to less liquid assets.
Dilution
The dilution changes proposed by the FCA include:
- The definition of ‘dilution’ will refer to an authorised fund, rather than a single-priced authorised fund.
- Disclosure of the choice of anti-dilution tools in the prospectus to include an explanation of its policies and procedures.
- Amendment to the Handbook text to explain that provisions require AFMs to take steps to mitigate dilution effects, rather than allowing it to do so.
- The addition of guidance stating that an AFM should apply the dual pricing rule, dilution levy or dilution adjustment to ensure fair treatment of all unitholders.
- A requirement for an AFM to have anti-dilution tools available and policies and procedures for using them.
- New guidance on factors to take into account when calibrating anti-dilution tools.
- A requirement to carry out an annual retrospective review of the effectiveness of the anti-dilution tool for each fund.
Liquidity management
It is not anticipated that AFMs will have to make significant change in their liquidity management approach but will have to make improvements in specific areas and clarify the FCA’s expectations.
The FCA expects AFMs to consider the liquidity profile of their funds, in particular where there is a large exposure to less liquid assets and determine whether the fund’s redemption terms are aligned with the profile. AFMs should not presume that daily dealing is the best structure, although the FCA recognises the challenges of moving away of the daily-dealing model. Where daily dealing is used in funds with a less liquid profile, AFMs should take sufficient measures such as the effective adoption and use of liquidity management tools and interrogating and adequately accounting for the liquidity risks of a fund’s assets through a robust liquidity risk management system.
The proposed liquidity management changes include:
- Guidance on factors to consider when assessing an asset’s liquidity.
- A requirement to consider conflicts of interest between transacting and remaining investors in a fund.
- A requirement to carry out stress testing to assess the liquidity risk of a UK UCITS under both normal and exceptional test circumstances.
The FCA also proposes creating two new guidance annexes in COLL to provide AFMs with guidance on effective liquidity risk management systems and an updated version of ESMA’s liquidity stress testing guidelines.
Any members wishing to contribute to AREF's response to this consultation should contact Jacqui Bungay, Head of Policy ([email protected]). AREF's Public Policy Committee will be overseeing AREF's response.
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