FCA: Firms need to increase their focus on liquidity risk
07 July 2023 UK
Image: Razvan/stock.adobe.com
The Financial Conduct Authority (FCA) has reviewed liquidity management levels of asset managers and found that firms need to increase their focus on liquidity risk.
The FCA made the statement after carrying out a review of liquidity management. The review, focused mainly on authorised fund managers (AFMs) and authorised funds, found that the gaps observed in liquidity management could lead to a risk of investor harm.
“Asset managers need to manage liquidity effectively,” the FCA warns. “Doing so is vital so investors are able to withdraw their investment in line with their expectations and at an accurate price that reflects its value.”
It found that while some firms demonstrated very high standards, there was a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise. A minority of firms in the review had inadequate frameworks to manage liquidity risk.
The FCA’s review also found that 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.
Additionally, the FCA found that 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.
Camille Blackburn, director of wholesale buy-side at the FCA, says: “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 among 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.”
The FCA made the statement after carrying out a review of liquidity management. The review, focused mainly on authorised fund managers (AFMs) and authorised funds, found that the gaps observed in liquidity management could lead to a risk of investor harm.
“Asset managers need to manage liquidity effectively,” the FCA warns. “Doing so is vital so investors are able to withdraw their investment in line with their expectations and at an accurate price that reflects its value.”
It found that while some firms demonstrated very high standards, there was a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise. A minority of firms in the review had inadequate frameworks to manage liquidity risk.
The FCA’s review also found that 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.
Additionally, the FCA found that 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.
Camille Blackburn, director of wholesale buy-side at the FCA, says: “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 among 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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