The UK's financial regulator has told asset managers to increase their focus on liquidity risk as part of a review of how it oversees the sector following last year's blow-up in the pensions market.
The Financial Conduct Authority (FCA) has warned today of gaps in the quality of liquidity management - which ensures funds can meet investor requests to withdraw their money - across the UK's £11 trillion asset management industry. It said that while some firms demonstrated "very high standards", there was "a wide disparity in the quality of compliance".
Camille Blackburn, director of wholesale buy-side at the FCA, said it is vital that those falling short take quick action to avoid the prospect of regulatory intervention.
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“We have seen examples in the market where liquidity risk has crystallised and the impact this can have on investors," she said.
"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."
In February the FCA announced a consultation on how it could improve its current regime for regulating the UK's 2,600 asset management firms. At that time it highlighted liquidity management as one of its top concerns.
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In the aftermath of former chancellor Kwasi Kwarteng's "mini-budget" in September of last year, there were collateral calls on thousands of pension funds that were using hedging contracts to manage their funding risks. This led to a sell-off in the gilts market as fund managers rapidly sold assets to handle heavy demand from investors.
The sell-off exposed liquidity weaknesses in the financial system as the crisis spilled over into other parts of the market. In the real estate sector, several managers were forced to restrict withdrawals from property funds.
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