UK FCA consults on fair redemption terms for authorised funds investing in illiquid assets

The UK Financial Conduct Authority (FCA) has published consultation paper CP26/35 on fair redemption terms for authorised funds investing in illiquid assets. The proposals apply primarily to non-UCITS retail scheme (NURS) funds invested predominantly in inherently illiquid assets, meaning funds where at least 50% of scheme property is invested in such assets, and that offer regular liquidity.

The FCA proposes the reforms to retail investment fund rules so that a fund’s redemption terms reflect the time it typically takes to sell illiquid assets in the portfolio. Key proposals include:

• broadening the scope of the funds investing in inherently illiquid assets (FIIA) regime by amending the definition of inherently illiquid assets
• limiting the frequency of dealing days (when the fund manager redeems or cancels investors’ units in the fund) to no more than one per month
• minimum 90-day notice periods for redemptions
• aligning the minimum redemption terms with the long-term asset fund (LTAF) regime
• enhancing investor disclosures, including updated risk warnings and prospectus disclosure requirements for funds with limited redemption arrangements
• permitting authorised fund managers (AFMs) of all NURS funds to introduce limited redemption arrangements to align the fund’s redemption terms better with its liquidity profile
• extending deferral powers to all NURS funds operating limited redemption arrangements
• allowing LTAF investors to revoke redemption requests during the notice period if the fund manager is satisfied it would not be unfair to other investors.

The deadline for feedback is 11 December, and final rules are anticipated in H1 2027. The FCA proposes a two-year implementation period for existing NURS funds that would fall within the amended scope of the FIIA regime for the first time. AFMs of these NURS funds newly brought in scope and their depositaries must comply with existing FIIA rules from 1 year after the new rules are made (aside from the risk warning rules).

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