UK: FCA finalises fund liquidity rules

Why should I read this?

On 13 August 2026, the FCA published Policy Statement PS26/17, “Enhancing fund liquidity risk management”. PS26/17 finalises the rules consulted on in Consultation Paper CP25/38 (published 9 December 2025).

The new rules apply to authorised fund managers (AFMs) of UK UCITS schemes and NURS. They require AFMs to have anti-dilution tools (ADTs) available for use, strengthen liquidity risk management processes, remove the listed asset presumption, and introduce updated guidance on liquidity stress testing.

The rules come into force on 1 February 2027, with transitional provisions applying to some rules until 1 August 2027 under the Collective Investment Schemes Sourcebook (Liquidity Management) Instrument 2026 (FCA 2026/54), made by the FCA Board on 30 July 2026.

What should I do?

AFMs of UK UCITS schemes and NURS should begin preparations now. The timetable is tight and firms have less than six months from publication to commencement.

• Review your current ADTs

Check whether your firm has swing pricing or a dilution levy (for single-priced funds) or dual-pricing procedures in place. If not, you must implement these before 1 February 2027. 

• Upgrade your ADT calibration

The FCA expects calibration to reflect explicit and implicit costs on a vertical slicing basis. Its 2020 survey found that funds with different strategies often used the same thresholds and only 13 of 272 considered market impact. Review whether your swing factors are correctly tailored to each fund’s asset class, investor base and liquidity profile.

• Remove reliance on the listed asset presumption

You can no longer presume a transferable security is sufficiently liquid solely because it is admitted to an eligible market. Review your liquidity assessment frameworks against the new COLL 5.2.7BG guidance.

• Assess the impact of the reduced derogation

The derogation from the eligible market test falls from one year to 20 business days. Consider whether your investment processes can accommodate this restriction.

• Review governance and decision-making

Map who owns ADT calibration, use of tools and liquidity escalation; ensure decisions and the rationale for them are documented; and test whether management information gives senior management sufficient visibility over redemptions, liquidity buckets and emerging stress.

• Update prospectuses

You must disclose your ADT policies and procedures. A transitional provision applies until the earlier of the next prospectus update or 1 August 2027.

• Review stress testing

UCITS scheme stress testing must now cover both normal and exceptional conditions. The “where appropriate” qualifier for reverse stress testing is removed. Review your framework against COLL 6 Annex 6.

• Conduct a gap analysis against the new guidance annexes

Two new annexes set out good liquidity risk management practices (COLL 6 Annex 5) and liquidity stress testing guidance (COLL 6 Annex 6). Benchmark your current processes.

• Factor in FRAME reporting

The FCA will use data from the proposed FRAME reporting regime, CP26/26 “Fund Reporting for Asset Management Entities (FRAME)”, to monitor ADT usage. If implemented as proposed, FRAME will give the FCA significantly better data on fund liquidity and ADT usage, increasing the regulator's ability to compare practice across firms. 

What else do I need to know about PS26/17?

Anti-dilution tools: availability

AFMs of UK UCITS schemes and NURS must have ADTs available for use. For single-priced funds, this means swing pricing (dilution adjustment) or a dilution levy. For dual-priced funds, the anti-dilution mechanism is the AFM’s procedures for allocating portfolio transaction costs when setting unit prices, plus its ability to make provision for large deals.

The AFM retains discretion over when to activate ADTs. It need not do so if it assesses that dilution does not pose a material risk. Feeder funds are not exempt. The FCA says a “majority of AFMs already have ADTs available for use”, citing its 2020 survey in which only 4 of 272 funds did not have ADTs.

The FCA will use FRAME data to monitor ADT usage. This creates supervisory pressure that may lead to defensive, over-cautious use of ADTs. Excessive swing pricing can harm investor returns. There is a risk that supervisory scrutiny will drive firms towards uniform calibration rather than genuinely fund-specific approaches.

Anti-dilution tools: calibration

ADT calibration must take into account explicit and implicit liquidity costs. Calibration must be calculated on the basis of vertical slicing (a pro-rata apportionment of scheme property). Vertical slicing is a calibration baseline, not a requirement to execute every transaction on that basis.

AFMs must consider an appropriate estimate of the likely market impact of selling significant quantities of a security. The FCA’s 2020 survey found that “funds with different primary strategies and assets often used the same thresholds for applying swing pricing” and “only 13 of the 272 noted that market impact was considered within swing factors”. This sets a higher bar than most firms currently meet.

Annual retrospective review

AFMs must conduct a retrospective assessment at least annually. This assesses the extent to which ADT decisions have resulted in fair treatment of all unitholders. The review must cover the choice of mechanism, calibration, and frequency of use.

Removing the listed asset presumption

AFMs can no longer presume a transferable security’s liquidity based solely on its admission to an eligible market. The FCA says this should not lead AFMs to “widely re-evaluate particular asset classes”. 

New guidance at COLL 5.2.7BG requires AFMs to consider:

• volume of transactions;
• number and quality of intermediaries and market makers;
• the scheme’s holding relative to average daily volume;
• opportunities to buy or sell and time to do so; and
• proportion of scheme property.

Removing the presumption creates an ongoing documentation burden for every transferable security. It could lead to conservative liquidity assessments that push AFMs away from small-cap and mid-cap equities. The FCA acknowledges the structural challenge but does not offer a solution.

Reducing the derogation for recently issued securities

The derogation from the eligible market test is reduced from one year to 20 business days. The FCA originally proposed removing the derogation entirely, then compromised to 20 days, however, this remains a severe reduction.

Transitional provisions apply:

• securities issued before 1 August 2026 can be held under the old rule for up to one year;
• securities issued between 1 August 2026 and 31 January 2027 must be admitted to an eligible market by 1 August 2027.

From 1 February 2027, the 20 business day limit applies to all new securities.

Stress testing

UCITS schemes must now stress test under both normal and exceptional conditions. The FCA has also materially strengthened its expectations on reverse stress testing by removing the previous ‘where appropriate’ qualification from the Handbook guidance. The removal of ‘where appropriate’ significantly raises the FCA’s expectation that firms conduct reverse stress testing across their UCITS ranges.

A UK version of the ESMA liquidity stress testing guidelines is incorporated into the Handbook as COLL 6 Annex 6. Stress testing must be carried out at least quarterly. The FCA acknowledges that “implementing reverse stress testing could introduce operational costs for firms not already conducting it”. Firms that do not currently conduct reverse stress testing may face operational costs in building this capability within the implementation timetable. The new guidance on non-redemption pressures, including margin and collateral calls, may also require some firms to broaden the scope of their stress testing.

Guidance on good liquidity risk management

New COLL 6 Annex 5 sets out guidance on effective liquidity risk management. It covers governance, dealing arrangements, redemption processes, liquidity management tools, stress testing, and non-redemption pressures (including margin and collateral calls). The annex does not apply to money market funds (MMFs).

Conflicts of interest

A new rule requires AFMs to identify, manage and monitor conflicts of interest between redeeming and remaining unitholders. The FCA dropped a separate proposed requirement on the AFM’s incentive to invest in less liquid assets, as this is already covered by existing rules.

Dual-priced funds

The FCA accepted feedback that its description of dual pricing as an ADT was not accurate. Final rules clarify that the anti-dilution mechanism for dual-priced funds is the AFM’s procedures for allocating portfolio transaction costs on setting unit prices, plus the ability to make provision for large deals.

Money market funds

The new ADT rules and guidance annexes do not apply to MMFs. The FCA will address MMF liquidity separately.

Host AFM arrangements

The FCA is not making new rules on host AFM arrangements. It will continue to monitor these and take a targeted supervisory approach.

Supervisory pressure through FRAME

The FCA will use FRAME data to monitor ADT usage. If implemented as proposed, FRAME will give the FCA significantly greater visibility over fund liquidity and ADT usage across the market. This should make it easier for the FCA to identify outliers and compare firms’ approaches, increasing the importance of being able to evidence the rationale for ADT calibration and use.

Implementation timeline

Rules come into force on 1 February 2027. Transitional provisions apply until 1 August 2027 for prospectus updates and the reduced eligible markets derogation. The substantive ADT and stress testing requirements must be met from day one. There is no transition for these.

The FCA says AFMs will have “nearly 12 months’ notice from the making of the rules”. This counts from the Board decision on 30 July 2026. In practice firms have less than six months to implement the 84 page policy statement published on 13 August 2026. Compare this with the EU approach to the implementation timetable for the AIFMD II reforms, which gives firms significantly longer to implement comparable liquidity management tool requirements. 

Smaller firms face a disproportionate challenge. They must meet the same compliance timeline as larger firms with dedicated regulatory change functions. 

Next steps

The rules come into force on 1 February 2027. Transitional provisions for prospectus updates and the derogation for recently issued securities expire on 1 August 2027.

The FCA will soon consult separately on wider liquidity proposals, including notice periods, for NURS invested in inherently illiquid assets. 

How ES can help

Eversheds Sutherland is a leading legal adviser to the UK investment funds sector, advising AFMs, UK UCITS management companies and depositaries on regulatory change. We can help you:

• Review and update your anti-dilution tool policies and procedures

• Benchmark your ADT calibration against the new FCA guidance

• Conduct a gap analysis of your liquidity risk management framework against COLL 6 Annex 5

• Review your stress testing programme against COLL 6 Annex 6, including reverse stress testing

• Assess the impact of the derogation reduction on your equity investment processes

• Review your liquidity classification systems following removal of the listed asset presumption

• Update your fund prospectuses within the transitional period

• Advise on the interaction with the AIFM regime reform (CP26/28) and FRAME reporting (CP26/26)