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Regulators may prevent investors from accessing funds in exceptional circumstances

Investors may face delays in gaining access to their cash if financial regulators decide that it is necessary, under proposals put forward by the Financial Stability Board (FSB).13 Jan 2017

The global body, which makes recommendations for financial reform, has published a report recommending policies to address structural vulnerabilities in the asset management sector. Among these, it has proposed giving authorities the power to impose tools such as 'redemption gates' under "exceptional circumstances".

While the decision to use such tools should "generally remain with the asset manager, because the manager is best placed to evaluate what is appropriate for a particular fund", relevant authorities should provide guidance and "could be granted the right to direct the application of such tools in exceptional cases where the manager is not best placed to make this evaluation", the FSB said.

The FSB has encouraged the International Organisation of Securities Commissions (IOSCO) to review its existing guidance on principles for the suspension of redemptions by the end of 2017.

"In particular, it could consider establishing standards with respect to how and under what conditions such extraordinary tools might be used," it said.

Liquidity tools such as redemption gates "may not function effectively in a manner that addresses financial stability risks, and may result in unanticipated outcomes", the FSB said. 

"While the availability of post-event measures such as suspensions and in-kind redemptions appears widespread, experience with their use varies. Their effectiveness may be conditional on the nature of the stress events and unanticipated outcomes may also result from their use at individual fund and fund type levels. The use of redemption gates and suspensions may have spillover effects on investors and on other funds," it said.

"Furthermore, asset managers may face reputational issues and other impediments to using such tools. In practice, it may be difficult for asset managers to implement in-kind redemptions, particularly for retail investors. However, some asset managers have indicated they would be willing to use such tools if certain criteria are met," it said.

The Financial Conduct Authority (FCA) plans to publish a discussion paper on redemptions early in 2017, prompted by the wave of suspensions in open-ended property funds that followed the UK's vote to leave the EU in June.

A number of fund managers suspended trading in July 2016 due to the rising number of investors seeking to cash in their assets as a result of market uncertainty following the UK's vote to leave the EU.

Investment expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com, said: "The events of last summer highlight the risks of aligning a non-liquid asset with the highly liquid structure of a daily dealing fund. This was exacerbated by the great uncertainty surrounding the valuation of the assets within funds – one of the primary requirements on a fund manager is to be confident of the accuracy of fund pricing."

"While there are already a number of mechanisms that can be used to manage liquidity, including notice periods, limited redemption periods and large deal levies, a number of funds did not have the power to use them, or it would have taken too long to implement," Budd said.

"The FCA’s discussion paper, which is expected in the next few weeks, is likely to take on board many of the messages from the FSB. However, one of the main reasons cited for property funds operate on a daily dealing basis is to ensure that they are acceptable to ISA managers; any changes therefore for funds aimed at the retail market will need to address the ISA position too," she said.