FCA raises market stability concerns over disorderly wind downs in the investment management sector

This year, for the first time, the FCA has published its Sector Views document alongside its Business Plan. The FCA’s view of the investment management sector identifies key areas of focus for the industry, including:
  • overpayment of some investment management services;
  • ability of custody banks to meet service standards;
  • products designed for ease of management rather than meeting investors’ needs;
  • disorderly failure or wind down of investment managers or their portfolios.
When winding down funds or investment managers, we have found that the first three issues listed above are often found together. Furthermore, typically, these issues are a result of an investment manager growing quickly while the back office processes fail to keep pace.
Fund structures
When winding up fund structures, there is often a lack of up to date financial records following the redemption of investors, and ongoing contractual payments to service providers where little value is being received by the fund. In some cases, cash accrued to settle termination costs can even be exhausted before a fund is formally closed leaving the manager in a position where it has to top up the fund in order to close it solvently. 
Firms must also consider how to deal with unclaimed distributions and de minimus balances on closure of a fund, which are typically not dealt with effectively by a fund’s articles or equivalent. Accordingly, if the exit process is considered in more detail when setting up a fund then it is highly likely that returns to investors will ultimately be maximised.
Investment managers
When winding down investment managers there are also a number of common issues arising. Retaining key staff with the knowledge of the firm’s operations is challenging in a wind down situation and managing communications is key. Other challenges include safeguarding assets, identifying and reconciling client assets, minimising payments to creditors when terminating contracts and leases and maximising value from any sale of all or part of the business. 

The risk that the failure of a very large asset manager could disrupt the financial system as a result of a downward selling spiral is clearly an important area of consideration for the FCA, particularly given the example of the outflow of capital from open ended real estate funds following the UK’s vote to leave the European Union. 

However, while it may require the failure of a very large manager for there to be any systemic impact, given the personal risks for directors and senior managers, it is important that firms of every size prepare and maintain a detailed wind down plan including realistic scenarios and steps. Firms must ensure that the document is not just a tick box exercise. 
How we can help
Our dedicated Corporate Simplification & Exits team specialises in helping our clients efficiently wind down funds and managers in a risk managed way that helps maximise the return to shareholders and minimise risk.

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