Following its Liquidity Management multi-firm review the FCA has found that firms need to increase their focus on liquidity risk, as failure to do so could lead to a risk of investor harm.
Asset managers need to manage liquidity effectively so investors are able to withdraw their investment in line with their expectations. Poor liquidity management however can create serious risks for investors and to wider market stability.
Whilst the review found some asset managers demonstrated very high standards and good practice, a disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise was identified. A few firms in the review also had inadequate frameworks to manage liquidity risk.
Key findings identified from the review include:
Whilst the tools for effective liquidity management were usually in place at firms, they lacked coherence when viewed as a full process and were not always embedded into daily activities.
Many firms attached insufficient weight to liquidity risk management in their governance oversight arrangements.
A wide range of approaches to liquidity stress testing existed in firms but some methodologies were deemed insufficient to assess actual liquidity of the portfolio.
Firms typically had governance and organisational arrangements in place to meet large one-off redemptions but did not have the necessary arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund.
Camille Blackburn, Director of Wholesale Buy-Side at the FCA, commented:
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.
Asset managers are encouraged to act on the review findings count of the findings, as many of the examples of good practice highlighted in the review are consistent with the Consumer Duty which comes into force later this month on 31 July.