FCA consults on fair redemption terms for authorised funds investing in illiquid assets (CP26/35)

On 8 October 2026, the Financial Conduct Authority (“FCA”) published Consultation Paper CP26/35 on changes to retail investment fund rules to ensure that a fund’s redemption terms reflect the time it typically takes to sell illiquid assets in the portfolio. The FCA proposes that non-UCITS retail scheme (“NURS”) funds holding at least 50% of their scheme property in inherently illiquid assets be limited to no more than one dealing day per month for redemptions, with a minimum notice period of 90 days. This would align such funds with the long-term asset fund (“LTAF”) regime.

The number of funds that would be directly affected by these proposals is relatively small. However, the proposals also affect distributors, investment platforms, self-invested personal pension (“SIPP”) operators, depositaries and unit-linked insurers.

The broader context

The new proposals form part of the FCA’s broader programme of work on liquidity, which includes:

• PS26/17 on liquidity risk management in undertakings for collective investment in transferable securities (“UCITS”) and NURS funds, published in August 2026;
• CP26/28 on liquidity rules for managers of unauthorised alternative investment funds (“AIFs”); and
• CP26/26 on the proposed FRAME reporting regime, which would collect data on how firms use liquidity management tools.

Addressing liquidity mismatch between liquidity profile and dealing terms

The FCA identifies several risks of harm caused by liquidity mismatch:

• Diluted fund performance: Some AFMs keep large cash balances or liquid holdings such as shares in Real Estate Investment Trusts (“REITs”) so they can offer daily liquidity. However, large cash buffers can reduce returns (‘cash drag’), while REIT shares provide different exposure from the underlying assets investors intended to access and may introduce equity-market volatility. The FCA has seen cash holdings in daily-dealt illiquid NURS funds that are, in some cases, more than double the average of around 6% held by comparable funds with 90-day notice periods.
   
• Weaker anti-dilution protection: Providing quick liquidity from illiquid funds makes it harder for AFMs to assign costs between entering, remaining, and exiting investors. In calculating dilution adjustment figures, AFMs have to estimate sale costs that may not be finalised for months. If those costs are underestimated, the fund’s value is diluted for the remaining investors.
   
• Poorly informed decisions: The promise of quick liquidity can hide the trade-offs and risks involved in holding illiquid assets. Consequently, investors may not make informed decisions about how much to lock away in longer-term assets.
   
• Suspension of dealings: Repeated, lengthy suspensions in the sector show that the promise of quick liquidity cannot always be kept.

As such, the FCA is looking to introduce a package of measures to ensure that illiquid funds have appropriate redemption terms. The FCA say that this is now a priority; ultimately, it is looking at improving funds’ resilience and the availability of funds investing in illiquid assets to retail investors.

Key proposals

The proposals are broader than originally proposed in 2020 and extend beyond real estate funds.

FIIA-prescribed limited redemption arrangements: The FCA proposes minimum redemption terms for any fund investing in inherently illiquid assets (“FIIA”) offering regular liquidity, aligning these more closely with the LTAF regime.  Redemptions for FIIAs will be limited to no more frequently than monthly in conjunction with a minimum 90-day notice period. These are minimum terms: AFMs may adopt longer redemption arrangements, subject to a maximum redemption period of 185 days. The FCA notes that it would not expect to authorise a fund investing substantially in assets that take more than 90 days to sell with a 90-day notice period. Funds of alternative investment funds (“FAIFs”) with at least 50% in any inherently illiquid assets would also be subject to these arrangements.

Redefining a FIIA: At present, a NURS fund can fall outside the FIIA regime if it has limited redemption arrangements. The FCA propose to remove that carve-out, so that whether a fund is a FIIA would depend only on its portfolio composition. 

The FCA also proposes to revise the definition of "inherently illiquid asset" so that:

• transferable securities held in NURS funds would be treated as inherently illiquid assets where they do not satisfy the "approved security" criteria under COLL 5.6.5R(1) (subject to the exclusion for certain government and public securities). This test will apply to NURS funds which either (i) directly invest in transferable securities, or (ii) invest in a second scheme which itself is a NURS fund that invests in transferable securities. The effect is to clarify that transferable securities required to be held in the 20% unapproved securities bucket will be treated as inherently illiquid assets. The FCA is also proposing to remove the newly issued transferable securities reference from the definition, on the basis that any securities currently caught by this exclusion will be captured by the proposed test under COLL 5.6.5R(1). However, where the NURS fund invests in a second scheme that is not also a NURS fund, the “approved security” criteria is disapplied in favour of the test for transferable securities held in a QIS, described below;
   
• units in a qualified investor scheme (“QIS”) would be treated as inherently illiquid assets where the QIS itself aims to invest at least 50% of the value of its scheme property in qualifying “inherently illiquid assets”, including where the QIS invests in second schemes which (i) are also QISs, and (ii) invest at least 50% of the value of their scheme property in inherently illiquid assets (which will cover feeder fund arrangements). Furthermore, the FCA also proposes removing the existing requirement relating to whether the QIS permits redemptions on timescales that do not reflect the time typically needed to realise its underlying assets. This is because, under the new definition, if a NURS fund invests in QIS units which themselves invest in inherently illiquid assets, the FCA will treat these units as inherently illiquid assets regardless of their redemption terms;
   
• for transferable securities held in a QIS, the FCA does not propose to apply the “approved security” criteria noted above. Instead, the FCA proposes broadly retaining the existing test under the FIIA regime, but with minor amendments which will require the AFM to now consider whether the securities are regularly traded, and in turn, the depth of their secondary market liquidity. Furthermore, the FCA has proposed reducing the period during which newly issued transferable securities not admitted to an eligible market can be treated as if they were not inherently illiquid from one year to 20 business days in line with PS26/17; and
   
• units in an LTAF would always be treated as inherently illiquid, irrespective of the portfolio composition.

Exchange-traded securities that satisfy the approved-security tests would not be regarded as inherently illiquid. 

Retaining the three-month buffer for hybrid funds: The FCA proposes to retain the existing three-month buffer for ‘hybrid funds’ (i.e., funds which invest across multiple asset classes within a single portfolio, such as those investing in real estate alongside equities) to provide AFMs of such funds with some flexibility in the event they stray over the 50% FIIA threshold when meeting redemption requests. 

The FCA expects AFMs to meet redemption requests by selling a cross section of the fund’s portfolio, rather than only selling the most liquid assets, and expects hybrid funds to calibrate their anti-dilution tools to compensate for this. With that in mind, the FCA envisages some NURS funds potentially straying over the 50% FIIA threshold in their attempt to meet large  redemptions from investors, and therefore proposes retaining the 3-month buffer to provide the AFM with time to bring the portfolio back within its intended liquidity allocation. This buffer will prevent the fund from drifting in and out of the FIIA regime, with the fund only becoming classified as a FIIA where it sits above the 50% threshold for at least 3 continuous months in the last 12 months.

Expanded application of limited redemption: The FCA also proposes making limited redemption arrangements more widely available. Under the proposal, any NURS manager could adopt limited redemption arrangements at its discretion. However, managers of funds with material exposure to illiquid assets, even below the 50% threshold, should expect the FCA to scrutinise their redemption terms at the Fund Authorisations gateway. The FCA has also said that the UK fund sector should move away from daily dealing without a notice period being the default for retail funds. 

Investor disclosures and communication: The current FIIA risk warning (COBS 4.5.16R), which states that an investor may experience a delay, would be replaced. Financial promotions would instead have to explain prominently, in plain language, that when investors request a redemption, they will not receive their money until the end of the notice period, and that they bear market risk during that period. This requirement, and enhanced prospectus disclosures, would apply to all NURS funds with limited redemption arrangements, not only FIIAs.

Introducing the FIIA-prescribed limited redemption arrangements would be treated as a significant change, rather than a fundamental change, and would not require unitholder approval. Existing investors would have to be given at least one year's notice. Notice of later significant changes unrelated to redemption terms would need to be at least 60 days plus the length of the notice period.

Suspensions: An AFM of a NURS fund with limited redemption arrangements would be required to accept redemption requests made during a suspension, unless it has reasonable grounds to refuse. The FCA also proposes that the time during which dealing is suspended would count towards the notice period. Existing guidance which sets a lower bar for suspending FIIAs would be deleted. Once the FIIA-prescribed limited redemption arrangements apply, FIIAs would generally face the same suspension standards as other authorised funds, so short-term liquidity shortfalls or difficulty selling assets quickly would not normally be enough on their own to justify a suspension.

Deferrals: The wider deferral power currently available to FAIFs, whereby AFMs can defer redemptions to a following valuation point provided it complies with the 185-day settlement limit, would be extended to all NURS funds which operate limited redemption arrangements. Consequential clarifications are proposed to the term ‘a following valuation point’ to clarify that, although the AFM may defer for up to 185 days, the FCA expects them to execute the redemption as soon as is reasonably practicable, and therefore the initial deferral should not exceed one month. The deferral rules for UCITS schemes and liquid NURS funds would not change.

Other changes: For NURS funds with limited redemption arrangements, the FCA proposes shortening the maximum valuation deadline from 185 to 182 days and applying the 185-day settlement limit to all such funds, rather than only NURS FAIFs. It would also introduce a rule allowing limited revocations of redemption requests, only where the AFM agrees and is satisfied that the interests of other investors would not be prejudiced.

The FCA also discusses anti-dilution mechanisms, noting that netting off subscriptions and redemption requests in the usual way may not be practical where they are received at different frequencies, or where only redemptions are subject to a notice period, although some netting should be possible. However, in this situation, AFMs would not be permitted to waive notice periods. 

Additionally, the FCA seeks feedback on rules that fit monthly-dealt funds poorly, including winding up. Technical changes would also accommodate the Direct-to-Fund dealing model in LTAFs, and similar revocation rules would apply to LTAF investors.

Tokenisation: The FCA’s view is that tokenisation does not change how liquid the underlying assets are. It does accept, however, that secondary trading in tokenised units could give investors another source of liquidity. The FCA notes it will continue to monitor these developments.

Timing

The proposed implementation timetable is as follows:

ISA Eligibility

The ISA Regulations currently do not allow for NURS funds with notice periods and limited redemption arrangements to be qualifying investments for stocks & shares ISAs. Without any amendment to the ISA Regulations (which is not within the FCA’s gift), the only appropriate ISA product for funds with FIIA-limited redemption arrangements would be the Innovative Finance ISA. Comparatively few of these types of ISA product are widely available; it is highly unlikely that the FCA’s proposals would be workable without any amendment to the ISA Regulations.

Distribution & Operational Challenges

The introductions of notice periods will create operational challenges for intermediaries and will impact on platform transfers, fund switching, portfolio rebalancing, SIPP administration and unit-linked insurance arrangements. Many intermediaries may need to invest in infrastructure, and adapt existing systems and processes along the distribution chain to accommodate funds with limited redemption arrangements. Nevertheless, the FCA considers that these operational difficulties should not prevent it from tackling the liquidity mismatch in FIIAs. 

The 90-day minimum notice period has often been cited as one of the key reasons why, to date, there has been limited take-up of the LTAF in the wealth space. Indeed, in the Investment Association’s recent paper on “Private Markets Democratisation”, it is noted that “many UK wealth platforms remain oriented towards daily-dealt products and are not designed to accommodate features such as notice periods, subscription cycles, redemption gates/deferrals, side pockets and other liquidity management tools”.  Many wealth managers have, in our discussions with them, noted that notice periods of 90 days is not a feature in mainland Europe and there is a risk that UK funds could be seen as uncompetitive and unmarketable. Unless and until the platforms decide to invest in the infrastructure to accommodate a wide range of funds that are not daily-dealt, the FCA’s ambitions are likely to be thwarted regardless of how laudable and well-intentioned they may be.

For SIPPs, a transitional provision would let operators treat existing FIIA units as standard assets for prudential purposes for three years. Given that FIIAs are not intended to be restricted mass market investments, it is unclear why any treatment other than standard assets is necessary – and if additional capital is required to be held by operators who make such funds available, the end-result is more likely to be that retail access to such funds is switched off.

The FCA is also seeking feedback on whether the capital surcharge should still apply to FIIA units newly added to SIPPs, and will consult separately on this. Model portfolio providers that rebalance quarterly could include FIIAs, but firms should remember that these are long-term investments that may not suit regular rebalancing, and should check that any substitute fund gives truly equivalent exposure. 

What next?

CP26/35 marks a clear policy direction: retail funds investing in illiquid assets should have redemption terms that match the liquidity of what they hold. 

The FCA invites comments by 11 December 2026 and intends to publish final rules in H1 2027. It intends to consider the position on redemption terms for QISs as part of its second consultation on reforming the alternative investment fund manager (“AIFM”) regime.

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For more information, to discuss how CP26/35 may affect your funds or distribution arrangements, or to take part in a round-table discussion on CP26/35 please contact Karagh Gilliatt, Aidan Campbell, Jamie Marshall, Sanaa Akhtar or your usual CMS contact.