ESRB issues recommendation on liquidity risks in investment funds
Date: 15 May 2020
By Alex Gillespie
On 14 May 2020, the European Systemic Risk Board (ESRB) published a recommendation on liquidity risks in investment funds. The ESRB acknowledges the fact that the coronavirus disease and necessary containment measures have been a severe and unprecedented shock to European economies. In this context, the ESRB has previously announced that it would focus on five priority areas where coordination between authorities in the European Union was likely to be particularly important to safeguard financial stability in the Union. One of these priority areas relates to financial market liquidity and the implications for asset managers and insurers.
The ESRB notes that the sharp fall in asset prices observed at the onset of the COVID-19 pandemic was accompanied by significant redemptions from certain investment funds and a significant deterioration in financial market liquidity. Whilst market conditions have subsequently stabilised, the ESRB is aware that significant uncertainty remains concerning the macrofinancial outlook.
The ESRB recognises that the investment funds sector is large and diverse and therefore focuses on two segments which it believes to be particularly high priority areas for enhanced scrutiny from a financial stability perspective, being funds with significant exposures to corporate debt or real estate.
The ESRB recommends that the European Securities and Markets Authority (ESMA):
- coordinates with the national competent authorities to undertake a focused piece of supervisory exercise with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of these two segments of the investment funds sector to potential future adverse shocks, including any potential resumption of significant redemptions and/or an increase in valuation uncertainty; and
- reports to the ESRB on its analysis and on the conclusions reached regarding the preparedness of the relevant investment funds.
ESMA must communicate to the European Parliament, the Council, the Commission and to the ESRB the actions undertaken in response to the ESRB’s recommendations and substantiate any inaction. The ESRB requests that ESMA submits this communication by 31 October 2020.
The ESRB also published a statement in relation to the use of liquidity management tools, please see our blog post below for further details.
For further information, a copy of the recommendation can be found here.
ESRB issues statement on liquidity management tools
Date: 15 May 2020
By Alex Gillespie
The European Systemic Risk Board (ESRB) has issued a statement on the use of liquidity management tools by investment funds with exposures to less liquid assets.
In its statement, the ESRB notes that its previous assessments of non-bank financial intermediation have highlighted potential vulnerabilities from investment funds that have short redemption periods but invest in less liquid assets. The ESRB believes that such a mismatch between redemption profiles and the liquidity of assets held by some investment funds increase the risk that, in the event of large redemptions, they may have to sell less liquid assets quickly, which could contribute to further falls in asset valuations and add to strains on market liquidity.
The ESRB stresses the importance of the availability and timely use of liquidity management tools, especially in times of stressed market conditions. The ESRB notes that the availability of liquidity management tools has not yet been harmonised across the EU, raising challenges to the consistent application of such tools. The ESRB refers to its 2017 Recommendation on leverage and liquidity in investment funds which proposed making a diverse set of liquidity management tools available to fund managers to help them deal with redemption pressures when market liquidity is low. It comments that recent market developments highlight the need to make progress in implementing this Recommendation and to introduce adequate legal backing for the use of such instruments.
A copy of the full ESRB statement can be found here.
FCA publishes statement on firms’ handling of post and paper documents during the COVID-19 pandemic
14 May 2020
By Ciara Davies.
On 13 May 2020, the FCA published a statement on how firms should handle post and paper documents, recognising that in these exceptional times, some firms may not be able to fully comply with them. The FCA asks firms to continue to comply with the requirements for post and paper-based processes, but recognises that in the current circumstances, this may not be fully possible.
Firms need to notify the FCA as soon as possible if they believe that they will be unable to comply. The FCA asks firms to ensure that customers are not disadvantaged because of delays and to make a particular effort to contact customers who do not access services online, with a particular emphasis on supporting vulnerable customers.
Firms must also mitigate the impact of any non-compliance with postal and paper processes and demonstrate the steps taken to do this to the FCA. The aim is to return to full compliance as soon as possible.
Firms also need to provide general updates on how they will treat post and cheques through their website and other channels, such as social media. In addition, customers who have sent instructions or cheques that have not been processed should be asked to contact the firm urgently by telephone or electronic means. Where possible, customers should receive the services or cover they require. For example, this could include retrospective cover. Although, the FCA warns that where uncashed cheques are client money under the CASS regime, the firm must consider whether proceeding in this way might breach CASS rules and expose its other clients to a risk of client money shortfall.
FCA publishes a letter to the Financial Ombudsman Service (FOS) Chief Ombudsman and Chief Executive, regarding how the FOS will handle complaints arising from firms’ acts or omissions during the COVID-19 pandemic
12 May 2020
By Ciara Davies.
The FCA has introduced a range of targeted temporary measures that are aimed at helping consumers through this difficult period. The measures all have one thing in common: ensuring that firms can work at pace and under difficult conditions support their customers.
Some firms have raised concerns about how the FOS will consider complaints arising from their acts or omissions during this time. To that end, the FCA asks the FOS to confirm that in determining what is fair and reasonable the ombudsman will take account of operational challenges faced by firms during this period, as well as the FCA’s revised expectations of what constitutes compliance with its rules, guidance and standards. Where the FCA has issued guidance that gives firms additional flexibility, the FCA asks the FOS to confirm that it will take this into account.
IA publishes guidance on suspected dividend payments and investment funds
Update posted: 12 May 2020
On 1 May 2020, the IA published a Q&A guidance document on suspended dividend payments and investment funds. The Q&A provides guidance on the issues that firms have raised, or anticipate will arise, as a result of COVID-19 creating exceptional circumstances for funds and capital markets.
The Q&A addresses guidance published by regulators including, the Financial Reporting Council, which has urged companies to ensure that they maintain sufficient capital reserves, and the Prudential Regulation Authority, which has required major banks to suspend all dividend payments and share buybacks until the end of 2020 and to cancel all outstanding 2019 dividend payments.
The first question in the Q&A is: How do AFMs treat funds with an income objective if companies are not paying dividends?
The IA’s guidance provides that this depends on the wording of the fund’s objective. Funds with a stated aim of providing income will not be in breach of their objective if it can be satisfied that investment decisions were made in line with that objective, but later corporate decisions reduced the amount of income available. However, for funds with an income target this can be more of an issue.
The IA also recommends that risk warnings should be reviewed in investor communications and be enhanced to give added prominence. It may also be necessary to amend the objective if it will not be achievable over the longer term.
The product review process needs to ensure that where there is a failure to meet a fund’s objectives, this is fully considered and justified. AFMs in the process of producing a fund’s value assessment may wish to consider explaining the challenges faced in the narrative of the value assessment.
The Q&A also addresses the impact of the current market challenges on the sector criteria for income funds. The IA informs members that it will continue to collect and publish information on funds’ income delivery in order to be fully transparent, but will suspend minimum dividend requirements. The hope is that this will allow funds to focus on sustainable investment strategies rather than focusing on meeting the IA’s requirements in the short term.
Finally, the IA provides a response to the question of whether it is a pricing breach if accrued dividends are subsequently cancelled. The IA identifies a number of scenarios that arise due to the relationship between the timing of the dividend cancellation and the fund’s XD and pay dates. It is emphasised that all the scenarios have in common the need for procedures to be in place to ensure that dividend cancellations are identified and recorded in a timely manner to avoid pricing errors.
FCA provides update on the approach firms should take when handling complaints
Date: 8 May 2020
By Ciara Davies.
On 7 May 2020, the FCA updated its statement on how firms should handle complaints during the COVID-19 pandemic
On prioritising complaints, in its statement, the FCA has stated that it expects firms to prioritise promptly paying complainants who have been offered redress and accepted that offer. In addition, those who are vulnerable to harm if their complaint is not resolved promptly or fairly should also be prioritised alongside micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly.
The FCA asked firms to be aware of the fact that COVID-19 and the associated public health measures would be likely to exacerbate the personal circumstances that cause vulnerability.
Any firm that is experiencing material difficulties in complying with chapter 1.6 of the Dispute Resolution: Complaints sourcebook should let the FCA know and relay the steps it is taking to manage and address its non-compliance.
The FCA refers to letters it has exchanged with the Financial Ombudsman Service (FOS) that provide additional clarity for firms on how the FOS will approach complaints during this time.