Britain's post-Brexit asset management revamp eyes liquidity, tokenisation

A general view of the Canary Wharf financial district in London

By Huw Jones

LONDON (Reuters) -Britain set out plans on Monday for a post-Brexit review of its rules for the 11 trillion pound ($13.2 trillion) asset management sector, with a focus on bolstering liquidity after a near meltdown in funds used by pension schemes last September.

Until Britain's departure from the European Union in 2020, rules for the UK funds sector were written in Brussels.

Brexit means UK regulators can write their own regulations, but the Financial Conduct Authority (FCA) makes clear in its broad review it will stick to "strong international standards" given Britain's global role in asset management.

The sector has fallen short in dealing with stresses in recent years in Britain and elsewhere due to inadequate liquidity, prompting scrutiny globally.

Property funds were suspended in the immediate aftermath of Britain's 2016 vote to leave the EU and when the economy went into lockdown to fight COVID-19 in March 2020 as investors sought to pull out their money.

So-called liability-driven investment (LDI) funds, used by pension schemes to ensure long-term payouts to pensioners, struggled to meet cash calls last September when UK government bond prices tumbled.

"The regulatory framework contains rules around liquidity management. Many of these rules are designed to protect consumers," the FCA said in a discussion paper on reforming the sector.

"But the growth of the fund industry means that liquidity management in funds is also relevant to the good functioning of markets," the discussion paper out for public consultation said.

Chris Cummings, chief executive of industry body the Investment Association, said the paper acknowledges the sector is already highly regulated. The need for more rules must be balanced against ensuring Britain remains globally competitive, he said.

The paper also considers how rules could be adapted for tokenised or digitised units in funds, meaning assets under management split into fractions to make it more affordable for small investors.

"With no cemented new proposals put forward, the next three months should give the industry the time to fly a kite on some Brexit dividend proposals," Kevin Doran, managing director of AJ Bell Investments, said.

Although Britain has left the EU, many of the money market funds, LDI funds and mutual funds offered in the UK are listed in EU centres such as Dublin and Luxembourg, even if managed in London.

The FCA said it wants to see fund managers complying with liquidity stress testing guidelines issued by the EU's securities watchdog ESMA, which will be converted into UK rules.

A public consultation is open until May, after which the FCA will focus on priority areas for changes.

($1 = 0.8310 pounds)

(Additional reporting by Iain Withers; Editing by Shounak Dasgupta)