On 8 October 2026, the Financial Conduct Authority (FCA) published a consultation paper in relation to fair redemption terms for authorised funds investing in illiquid assets (CP26/35).
Background
The FCA sets out that it has worked with the International Organization of Securities Commissions and the Financial Stability Board to develop new international standards for managing liquidity risks and has reviewed its existing liquidity risk management rules to make sure it aligns with these standards but that that it believes more detailed requirements are appropriate for authorised funds, because they are designed to have regulatory protections that make them suitable for retail investors.
As a result, this consultation focuses on non-UCITS retail scheme (NURS) funds that are predominantly invested in inherently illiquid assets, alongside this the FCA also proposes some minor changes to the long-term asset fund (LTAF) regime and some small changes to align with recent changes made to the Collective Investment Schemes sourcebook to facilitate the ‘Direct-to-Fund’ dealing model it introduced in April 2026.
Summary
In CP26/35 the FCA sets out the following proposals:
- Minimum redemption terms for NURS funds invested in inherently illiquid assets: The FCA proposes mandatory minimum redemption terms for NURS funds with at least 50% of assets invested in inherently illiquid assets (referred to in the paper as FIIAs). These funds would be required to offer redemption dealing no more than monthly and apply a minimum 90-day notice period. The FCA would broaden the FIIA regime beyond real estate funds and remove the current exemption for funds already operating limited redemption arrangements. It also proposes revising the definition of inherently illiquid assets, including treatment of units in qualified investor schemes (QISs), LTAFs, recognised schemes and unregulated funds.
- Investor disclosures and communication: The FCA emphasises that investors must clearly understand redemption restrictions before investing. It proposes replacing the existing FIIA risk warning with a more prominent explanation that investors will not receive proceeds until the end of the notice period and will remain exposed to market movements during that period. Similar warnings would apply to all NURS funds with limited redemption arrangements, not just FIIAs. Prospectuses would need to provide more detailed information on notice periods, deferrals and suspensions. Existing funds introducing mandated redemption restrictions would be treated as making a significant change rather than a fundamental one, with investors receiving at least one year’s notice.
- Suspensions: Although the FCA expects its proposals to reduce the likelihood of suspensions, it recognises that suspensions may still be necessary in exceptional circumstances. It proposes requiring NURS funds with limited redemption arrangements to continue accepting redemption requests during a suspension, unless there are reasonable grounds for refusal. Time spent in suspension would count towards any redemption notice period, preventing investors from having to restart the waiting period after trading resumes. The FCA also proposes removing guidance that treated FIIAs differently from other funds in relation to liquidity pressures, reflecting the view that funds operating appropriate notice periods should generally be subject to the same suspension standards as other authorised funds.
- Deferrals: The FCA proposes extending the enhanced deferral powers currently available to NURS funds of alternative investment funds (FAIFs) to all NURS funds operating limited redemption arrangements. This would allow managers greater flexibility to defer redemptions when large requests threaten orderly liquidity management. The regulator does not propose extending these powers to UCITS or predominantly liquid NURS funds. Managers would still need to treat investors fairly and process earlier redemption requests before later ones. Although redemptions could technically be deferred for up to 185 days, the FCA expects managers to complete redemptions as soon as reasonably practicable, typically within a month where possible.
- Operational challenges for intermediaries: The FCA acknowledges that platforms, advisers, self-invested personal pension (SIPP) operators, model portfolio providers and insurers face operational challenges in accommodating funds with notice periods. These include difficulties with transfers, switching, portfolio rebalancing and administration. However, the FCA believes such challenges should not prevent action to address liquidity mismatch. It argues that notice periods do not automatically make funds unsuitable or complex for retail investors and may be appropriate for long-term investment strategies. The chapter also discusses implications for SIPPs and unit-linked insurance products, invites feedback on prudential treatment and confirms that FIIAs would remain permitted links for unit-linked business.
- Other changes: This chapter contains a range of supporting reforms. The FCA proposes clarifying the maximum redemption timetable by shortening the valuation deadline from 185 to 182 days while retaining a 185-day maximum settlement period. It would allow redemption requests to be revoked in limited circumstances, provided investors are not prejudiced. The FCA also discusses implications for anti-dilution mechanisms, amendments to fund constitutions, changes for FAIFs investing in LTAFs, and revisions to the definition of “dealing day”. Additional technical changes would align the regime with monthly-dealt funds and the Direct-to-Fund dealing model, while similar revocation rules would be extended to LTAFs.
- Discussion on tokenisation and funds invested in inherently illiquid assets: The FCA recognises that tokenisation and distributed ledger technology could transform how investors access liquidity in private market funds. However, it stresses that tokenisation does not alter the fundamental liquidity characteristics of underlying assets; tokenised property remains as illiquid as property itself. The FCA therefore maintains that redemption terms should continue to reflect underlying asset liquidity. While tokenisation could facilitate secondary market trading, offering investors alternative liquidity sources without fund redemptions, it may also introduce new risks, including market stress dynamics, front-running and information leakage. Consequently, the FCA sets out its view that tokenisation does not currently undermine the rationale for the proposed redemption reforms.
Next steps
The FCA has asked for feedback on CP26/35 by 11 December 2026.
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