Ukraine – FCA to consult on the use of side pockets by retail funds

The FCA has today announced the start of a consultation process on allowing UK authorised retail funds to make ‘exceptional’ use of side pockets.

At the moment, discussions are taking place with stakeholders but a formal consultation paper is due to follow – no publication date is set for the CP but it will presumably be in the near future.

Given the pressing timeframe on this, the FCA invites early engagement with any market participants, consumer groups or investor representatives with views or ideas on the subject – these should contact the FCA at: afmpolicy@fca.org.uk.

Why this consultation?

This development comes in the light of what the FCA accepts are “significant practical challenges” in disposing of Russian and Belarussian assets given current suspensions and extensive global sanctions.

As such assets have become difficult to sell and/or hard to value, use of a side pocket would give authorised fund managers (AFMs) the option to separate these from the fund’s other core investments.

As the FCA notes, this could allow:

• new investors to enter the fund without getting exposure to Russian assets
• existing investors to redeem the rest of their investment, while illiquid Russian assets remain in the separate side pocket (and in many cases marked to zero), while retaining rights to any eventual value
• some funds to end their current suspension of dealing.

What is the FCA likely to propose?

From the FCA’s statement, it is clear already that its proposals

• will be aimed at ensuring that any side pockets introduced (and the date on which they take effect) treat existing, redeeming and subscribing investors fairly.
• will allow an AFM to use a side pocket where it considers this to be in the best interests of the fund.
• are intended to avoid speculative new investment into affected funds at the expense of existing investors.
• will be limited in scope to assets that are illiquid as a result of the Russia/Ukraine war. (The precise scope remains to be determined as part of the consultation process.)

The FCA’ statement reminds AFMs that it is their duty to ensure fair and accurate valuation of assets with subscriptions and redemptions taking place at a fair price.

We will be monitoring this consultation and reporting on how it develops.