FCA consults on fair redemption terms for authorised funds investing in illiquid assets

Open-ended funds that invest in illiquid assets face an inherent tension: fund managers must meet redemptions on the terms investors signed up for, even though the underlying assets may take months to sell. With the growth in recent years of the private markets, and the typically longer timeframes for the sale of private market assets like real estate or infrastructure projects, this problem can compound. 

For unauthorised funds, the FCA is broadly comfortable with the existing Handbook rules, but for authorised funds, the FCA believes more detailed rules are needed – particularly because they are designed to have regulatory protections that make them suitable for retail investors.  As such, on 8 October 2026, the FCA published a consultation paper (CP26/35) on fair redemption terms for authorised funds investing in illiquid assets. 

The consultation focuses on non-UCITS retail schemes (NURS) that are predominantly invested in inherently illiquid assets. By offering daily dealing with no meaningful notice period, authorised fund managers (AFMs) provide regular liquidity but create a mismatch with the underlying assets. Capping dealing frequency and introducing minimum notice periods would better align redemption terms with the time needed to sell illiquid holdings, reducing the risk of suspensions and giving investors a clearer signal of the fund's true liquidity profile. 

Background

The FCA has in fact considered this issue in the past, and consulted on similar proposals in August 2020, in CP20/15. At the time these were paused whilst international standards for managing liquidity risks were developed, and due to stakeholder concerns that the fund distribution system was not equipped to accommodate notice periods. On the latter point the FCA considers that these operational challenges should not stop it dealing with liquidity mismatch in some NURS, and the risks to investors which flow from it. The FCA’s new proposals in CP26/35 widen the scope of its 2020 proposal, covering all inherently illiquid assets rather than just real estate.

As noted above the FCA is limiting its proposals to NURS. The other types of authorised fund which can have exposure to inherently illiquid assets are Qualified Investor Schemes (QIS) and LTAFs.LTAFs already must have redemption terms that reflect the illiquidity of their assets. The FCA will consider the position for QIS as part of its second consultation on reform of the AIFM regime (this CP is expected in Q1 2027). Nevertheless, the FCA says, a full-scope UK AIFM managing a QIS must already align the dealing terms with the liquidity of the underlying assets, and a number already have notice periods. Further, as these funds are primarily for professional investors, they do not present the same consumer protection concerns. As such, the FCA is minded to allow QIS managers to retain greater flexibility on the redemption terms.

The proposed rules

 The latest proposals apply to NURS that have at least 50% of the value of scheme property invested in inherently illiquid assets and allow investors to redeem some or all of their investment at any point, rather than at the end of an agreed period. The FCA proposes to amend the current FIIA regime to widen its scope and: 

•           Limit dealing days (when the fund manager redeems or cancels investors’ units in the fund) to no more than once a month.

•           Introduce a minimum 90-day notice period for redemptions (the time between an investor's redemption request and the fund manager executing it).

•           Align these minimum redemption terms with the long-term asset fund (LTAF) regime.

The FCA also proposes to allow LTAF investors to revoke redemption requests during the notice period, if the fund manager is satisfied that it would not be unfair to other investors.

NURS below the 50% threshold

For NURS that fall below the 50% illiquid asset threshold, there is greater flexibility around redemption periods too. The FCA also proposes to permit the AFM of any NURS fund to introduce limited redemption arrangements where they believe that it would deliver better alignment between the fund’s investment strategy, liquidity profile and redemption policy. 

In practice, the FCA would still expect AFMs with material exposure to inherently illiquid assets - even below 50% - to operate limited redemption arrangements, though with greater discretion over the form those terms take. Where portfolio exposure is close to 50%, AFMs should have good grounds for being confident that it will not drift above the threshold for more than three continuous months in a year.

AFMs should expect the FCA to scrutinise redemption terms in detail at the Fund Authorisations gateway regardless of whether the 50% threshold is met, and should be able to demonstrate the ongoing appropriateness of dealing terms for the portfolio's liquidity. New guidance is expected to be added to COLL 6 confirming that limited redemption arrangements may be appropriate even where a NURS does not invest in inherently illiquid assets.

Next Steps

The consultation closes on 11 December 2026. The FCA expects to publish final rules in H1 2027. 

To allow for a smooth transition and minimise disruption to retail investors, the FCA proposes a two-year implementation period, structured as follows:

• For any new funds launched after the rules are made, the new rules would apply 6 months later
• AFMs of existing NURS in scope of the FIIA regime would be able to introduce the FIIA-prescribed limited redemption arrangements before the end of the 2 years, should they wish to do so. However, they would need to comply with all the rules that apply to the operation of FIIA prescribed limited redemption arrangements if they do so
• Existing NURS brought into scope of the FIIA regime for first time must comply with many of the existing FIIA rules from 1 year after the new rules are made. However, the AFMs of existing NURS coming into scope of FIIA regime for first time would not need to amend the redemption terms of these funds until 2 years after the rules are made.
• For existing NURS with limited redemption arrangements or NURS FAIFs but which are not FIIAs, the relevant rules will take effect 6 months after they are made. However, the FCA proposes to allow an additional 6 months to comply, including updating the instrument constituting the fund and the prospectus.