FCA finalises fund liquidity risk management reforms

On 13 August 2026, the FCA published Policy Statement PS26/17: Enhancing fund liquidity risk management, setting out targeted reforms for authorised fund managers (AFMs) of UK UCITS schemes and non-UCITS retail schemes (NURS). The reforms are intended to strengthen liquidity risk management so funds can meet redemption requests in line with their terms, while protecting remaining investors and supporting market integrity.

The new rules and guidance come into force on 1 February 2027, while transitional provisions will apply to some requirements until 1 August 2027.

Note that the new guidance will not apply to money market funds, at least for the time being.

What is changing?

The FCA’s reforms focus on three main areas:

• Anti-dilution tools - ensuring funds have tools available to protect investors from the costs caused by other investors entering or leaving the fund.
• Liquidity assessments - strengthening expectations on how AFMs assess the liquidity of transferable securities, such as shares and bonds.
• Liquidity stress testing - introducing new Handbook guidance on good liquidity risk management and stress testing practices.

Taking these in order

1. Anti-dilution tools

AFMs of UCITS schemes and NURS will need to have:

• policies and procedures for identifying actual or potential dilution;
• a process for assessing the impact of dilution at each valuation point; and
• an anti-dilution mechanism available where dilution poses a material risk to unitholders.

For single-priced funds, this means having a dilution levy or dilution adjustment. For dual-priced funds, the mechanism is based on allocating portfolio transaction costs when setting unit prices, together with the ability to make provision for large deals.

Importantly, the FCA is not introducing fixed triggers for when these tools must be used. AFMs will retain discretion over when to activate them, taking account of the fund’s strategy, investor base and liquidity profile.

AFMs must also carry out a retrospective review at least annually, looking at decisions on applying anti-dilution mechanisms and the extent to which those decisions resulted in fair treatment of all unitholders.

2. Calibration

The FCA expects AFMs to calibrate anti-dilution tools by considering both explicit and implicit liquidity costs, including the likely market impact of selling a significant quantity of a security to meet redemption requests.

AFMs must also carry out a retrospective review at least annually, looking at decisions to apply anti-dilution mechanisms and the extent to which those decisions resulted in fair treatment of all unitholders.

3. Liquidity assessments

The FCA is removing the “listed asset presumption”. AFMs will no longer be able to assume that a transferable security is sufficiently liquid simply because it is admitted to trading on an eligible market.

Instead, AFMs should consider factors such as:

• the quality of secondary market activity;
• trading volumes over a reasonable period;
• the number and quality of intermediaries and market makers;
• the size of the fund’s holding compared with average daily trading volume;
• the time likely to be needed to buy or sell the security; and
• the proportion of scheme property represented by the security.

For recently issued transferable securities, the FCA will keep the derogation from the eligible market test but reduce the period for securing admission to trading from one year to 20 business days.

4. Stress testing and governance

The FCA is also introducing new guidance on liquidity stress testing. AFMs of UCITS schemes must conduct stress tests to assess liquidity risk under both normal and exceptional circumstances.

The new guidance covers areas such as:

• stress testing models;
• governance and escalation;
• testing frequency;
• asset and liability stress testing;
• reverse stress testing;
• investor behaviour and concentration; and
• the role of depositaries.

Timing and next steps

The new rules and guidance come into force on 1 February 2027. Transitional provisions will apply to some requirements until 1 August 2027, including prospectus changes and the shorter derogation period for recently issued securities.

The FCA has not applied the new guidance to money market funds, although it expects future UK MMF regulatory work to consider how these changes should apply to MMFs.,

The FCA also plans to consult separately on wider liquidity proposals for authorised retail funds investing in inherently illiquid assets, particularly daily-dealt property funds.