In a significant regulatory shift aimed at fortifying the stability of the UK’s financial landscape, the Financial Conduct Authority (FCA) has unveiled a series of sweeping proposals designed to reform the liquidity management of open-ended funds. The move targets funds that invest in "inherently illiquid assets"—such as commercial real estate and large-scale infrastructure projects—and seeks to eliminate the inherent mismatch between daily liquidity and long-term asset holding.
The core of the proposal mandates that investors provide at least 90 days’ notice before they are permitted to withdraw capital from these specific funds. By introducing this mandatory "redemption notice period," the regulator hopes to prevent the "fire-sale" scenarios that have historically plagued property funds during periods of market volatility.
The Core Proposals: Bridging the Liquidity Gap
At the heart of the FCA’s consultation is a fundamental re-evaluation of how open-ended investment vehicles operate. Currently, a subset of funds that hold assets which are difficult to sell quickly—such as buildings or unlisted infrastructure—continue to offer "daily dealing." This allows investors to demand their money back on 24 hours’ notice, a promise that creates a structural vulnerability.
When a wave of redemption requests hits a fund holding illiquid assets, the fund manager is forced into a corner. If the fund does not hold sufficient cash reserves, it must either suspend withdrawals entirely—locking investors in against their will—or dispose of its assets in a rush. Such "forced sales" often result in the assets being sold at a significant discount, which harms the remaining investors in the fund and can create contagion-like stress across the wider financial market.
The FCA’s proposed 90-day notice period is designed to act as a buffer. By providing fund managers with three months to plan for liquidations, the regulator believes they can sell holdings in a more orderly, methodical, and value-preserving manner. Crucially, the proposal allows for notice periods to exceed 90 days if the specific portfolio or strategy of a fund warrants a longer timeframe to ensure stability.
Chronology of Market Strain and Regulatory Action
The FCA’s current proposal is the culmination of years of scrutiny following several high-profile fund suspensions in the UK.
- The 2016 Real Estate Crunch: Following the UK’s vote to leave the European Union, a sudden surge in redemption requests forced several major property funds to halt trading, sparking concerns about the sustainability of the daily-liquidity model for real estate.
- The 2019/2020 Liquidity Crisis: Market instability, exacerbated by the COVID-19 pandemic, led to further widespread suspensions in open-ended property funds, reigniting the debate over "mismatched" liquidity.
- 2026 Policy Consultation: With the industry having undergone several iterations of guidance, the FCA has now formalised these concerns into a concrete policy paper. The regulator has set a deadline of 11 December 2026 for industry stakeholders to submit their formal responses.
- Implementation Horizon: Should the rules be adopted, the FCA has proposed a two-year transition period for existing funds to bring their operations into compliance. Furthermore, funds must provide their investors with at least one year’s advance notice before implementing these changes, ensuring that the transition does not trigger the very volatility the rules aim to prevent.
Defining "Inherently Illiquid Assets"
The FCA is focusing its efforts on a category of assets it terms "inherently illiquid." These are defined as assets that cannot be sold in a short timeframe without causing a material reduction in their market value.
Property and infrastructure are the primary targets here. Unlike stocks traded on the London Stock Exchange, which can be sold in seconds with minimal price impact, a shopping centre or a wind farm may take months to value, market, and legally transfer.
The proposal specifically covers authorised fund managers of non-UCITS retail schemes (NURS). These vehicles are designed for retail investors but are often used to hold asset classes that are not liquid enough for the strict daily-redemption requirements of standard UCITS (Undertakings for Collective Investment in Transferable Securities) funds. By forcing a notice period on these NURS, the FCA is aligning the UK’s regulatory framework with evolving international standards for open-ended funds, ensuring that the UK remains a competitive, yet safe, environment for global asset management.
Official Responses and Regulatory Intent
The reaction from the regulator has been one of clarity and purpose. Michelle Beck, the FCA’s markets director, emphasised that the primary objective is to restore investor confidence by ensuring that the "promise" of a fund matches its underlying reality.
"Funds should be clear about whether they offer quick access or are built for longer-term investments like property," Beck noted in a statement. "Our rules will help firms make that clearer and give the market more confidence to invest."
The FCA’s stance is that transparency is the best defense against market panic. By mandating a notice period, the FCA is effectively forcing fund managers to stop marketing "instant access" to assets that are, by nature, long-term investments. This is intended to stop the "first-mover advantage," where investors rush to withdraw funds simply because they fear that others will do the same, creating a self-fulfilling prophecy of fund insolvency.
Implications for Investors and the Fund Industry
For the investment industry, the implications are profound. This shift will require a significant overhaul of fund prospectuses, marketing materials, and internal liquidity risk management systems.
1. The Shift in Investment Strategy
Fund managers will likely move away from the "daily dealing" model entirely for property and infrastructure-heavy portfolios. This may reduce the popularity of these funds among short-term retail traders but could increase their appeal to long-term institutional investors who value the stability of a fund that is not constantly struggling to manage liquidity.
2. Market Efficiency
By preventing "fire sales," the FCA aims to ensure that the prices of illiquid assets remain more reflective of their fundamental value. If managers have 90 days to dispose of an asset, they are significantly more likely to achieve a fair market price than if they were forced to sell in a 48-hour window. This protects the wealth of long-term savers who might otherwise see their holdings eroded by panic-driven asset dumping.
3. Increased Operational Complexity
For fund administrators, the implementation of a 90-day notice period adds layers of complexity. They will need to manage "queues" of redemptions and communicate clearly with investors about their exit timelines. The requirement to provide one year’s notice before changing fund terms is a significant operational hurdle, intended to prevent a mass exodus of capital before the new, stricter rules come into force.
4. Global Alignment
The UK’s move is not happening in a vacuum. As global financial regulators look to harmonise the treatment of private-market assets, the UK’s alignment with international liquidity standards is essential to maintain its status as a premier financial hub. Investors operating across borders will benefit from a more predictable regulatory environment, even if that environment demands longer lock-in periods.
Conclusion: A More Resilient Market
The FCA’s proposal represents a pragmatic, if long-awaited, step toward addressing the "liquidity mismatch" that has threatened the stability of retail-facing private asset funds for nearly a decade. By moving the goalposts from "instant access" to "informed access," the regulator is prioritizing the long-term health of the market over the convenience of immediate liquidity.
As the industry prepares to respond to the consultation by the 11 December 2026 deadline, the focus will shift to the practicalities of implementation. While the transition will undoubtedly be complex, the ultimate goal—a financial system where funds are transparent, stable, and resilient to the shocks of the modern economy—is a consensus priority for regulators, managers, and investors alike.
The coming two-year transition period will be a critical test of whether the industry can adapt to these new realities without causing the very market disruption the rules are designed to prevent. For now, the message from the FCA is clear: the era of the "instant-access, illiquid-asset" fund is drawing to a close.
