The Financial Conduct Authority’s Review of Liquidity Management in the UK’s Asset Management Industry

The UK’s financial regulator, the Financial Conduct Authority (FCA), is looking to improve liquidity management in the country’s £11tn asset management industry in a post-Brexit review of how it regulates the sector. This comes after a blow-up in the pensions market last year, which exposed liquidity and operational weaknesses in the market for liability-driven investing. The FCA is now consulting on how it could improve its current regime for regulating the UK’s 2,600 asset management firms, with the aim of boosting competition, encouraging innovation, and protecting investors.

The Pensions Market Blow-Up

The sell-off in the gilts markets last autumn triggered collateral calls on thousands of pension funds that used hedging contracts, forcing the plans to rapidly sell assets including gilts to replenish collateral. The liquidity crisis spilled over into other parts of the market, including real estate, prompting several asset managers to restrict withdrawals from property funds because they were unable to handle heavy demand from investors.

The UK’s Post-Brexit Regulatory Landscape

The crisis came as the UK prepared to redraw its financial regulation rule book in the aftermath of Brexit. The FCA, and the Prudential Regulation Authority, which regulates Britain’s biggest banks and insurers, must transpose thousands of pages of EU law into new UK legislation. The UK government and regulators have promised that the new approach will be more flexible to changing industry dynamics, and more appropriate for the British market, and insist that the reforms will not lead to a wave of deregulation that could sow the seeds for future crises.

The Bank of England’s Financial Policy Committee

The Bank of England’s Financial Policy Committee, which is responsible for identifying risks building in the financial system, has repeatedly cited “challenging liquidity conditions” as a potential flashpoint, prompting the central bank to launch what it says is the world’s first stress test of market liquidity. Meanwhile, the PRA is pushing banks to more carefully scrutinise the threats their asset management clients are exposed to, including liquidity risks. The UK’s actions come amid a broader global push to tame risks that have migrated from the now heavily regulated banking sector.

Related Facts

• The UK’s asset management industry is worth £11tn.
• The FCA is consulting on how it could improve its current regime for regulating the UK’s 2,600 asset management firms.
• The Bank of England’s Financial Policy Committee is responsible for identifying risks building in the financial system.
• The PRA is pushing banks to more carefully scrutinise the threats their asset management clients are exposed to, including liquidity risks.

Key Takeaway

The UK’s financial regulator, the Financial Conduct Authority, is looking to improve liquidity management in the country’s £11tn asset management industry in a post-Brexit review of how it regulates the sector. This comes after a blow-up in the pensions market last year, which exposed liquidity and operational weaknesses in the market for liability-driven investing. The FCA is now consulting on how it could improve its current regime for regulating the UK’s 2,600 asset management firms, with the aim of boosting competition, encouraging innovation, and protecting investors.

Conclusion

The Financial Conduct Authority is taking steps to improve liquidity management in the UK’s asset management industry in light of the pension market blow-up last year. The FCA is consulting on how it could improve its current regime for regulating the UK’s 2,600 asset management firms, with the aim of boosting competition, encouraging innovation, and protecting investors. The Bank of England’s Financial Policy Committee and the PRA are also taking steps to mitigate risks and ensure that the financial system is stable and secure.