FCA tells asset managers to increase focus on liquidity risk

Written by Adam Cadle

06/07/2023

The FCA has told UK asset managers to increase their focus on liquidity risk.

The regulator said that as things stand, “gaps observed in liquidity management could lead to a risk of investor harm”.

The FCA’s review found:
• The building blocks and tools for effective liquidity management were usually in place at firms, but these lacked coherence when viewed as a full process and were not always embedded into daily activities; 
• Many firms attach insufficient weight to liquidity risk management in their governance oversight arrangements, as well as insufficient challenge and escalation, particularly in volatile environments; 
• A wide range of approaches to liquidity stress testing with some methodologies insufficient to assess actual liquidity of the portfolio, using assumptions that were not appropriately conservative. For example, some firms’ models assumed that they would always sell the most liquid assets, without ever giving regard to the liquidity of selling a ‘vertical slice’ of the portfolio;
• Firms typically had governance and organisational arrangements in place to meet large one-off redemptions but did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund;
• Wide variations in the application of anti-dilution tools such as swing pricing, which could affect the price investors receive when redeeming.

Camille Blackburn, director of wholesale buy-side at the FCA, said: “We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors. This review should serve as a warning to all asset managers that they need to get this right. We expect boards to discuss our findings and assure themselves that their firms are not amongst the minority with serious gaps in managing liquidity risk. It’s vital the outliers take quick action. They risk regulatory intervention if they don’t take this opportunity to address weaknesses.”

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