UK Regulator Tightens Rules to Avert Future Cash Crunch

The UK’s financial regulator said on June 8 that it plans to tighten rules for money market funds, following the COVID-19 pandemic’s impact on the economy, which exposed vulnerabilities in the sector during a period of market turmoil.

The Financial Conduct Authority (FCA) said the reforms follow government plans to replace the UK’s current Money Market Funds Regulation and are intended to ensure that funds can better withstand periods of market stress.

Money market funds are widely used by businesses, pension funds, insurers, local authorities, and investment managers to hold cash and short-term investments. They are generally considered lower-risk investment vehicles and often serve as an alternative to bank deposits.

The reforms come as regulators around the world continue to address vulnerabilities exposed during the market turmoil of March 2020, when investors rushed to move money into cash during the early stages of the COVID-19 pandemic.

UK officials announced on May 15 that under a new framework, most requirements would be set through FCA rules and guidance.

The UK Financial Secretary to the Treasury, Spencer Livermore, said the government, the FCA, and the Bank of England have worked with international partners, including the European Commission and the Financial Stability Board, to improve the sector’s resilience.

The new regime is expected to take effect in the fourth quarter of 2026, subject to approval by UK lawmakers.

Why FCA Is Making Changes

The reforms stem from concerns that money market funds may come under pressure when large numbers of investors simultaneously seek to withdraw funds.

During the market turmoil of 2020, some money market funds experienced significant outflows as investors sought cash, prompting regulators to review whether the sector could better withstand future shocks.

The FCA first consulted on reforms in 2023. The proposals would require money market funds to maintain greater liquidity to meet withdrawals during turbulent periods.

Regulators also want to remove a rule that can lead to restrictions on withdrawals when a fund’s cash holdings fall below certain levels. They say that would make it easier for funds to use their reserves when investors need access to their money.

While most firms backed the changes, many argued that the FCA’s original proposal would require funds to hold more cash than necessary. The regulator said funds should keep more money readily available in case investors suddenly want to withdraw their cash during periods of market turmoil.

It also wants fund managers to do more to identify the risk of large groups of investors pulling money out at the same time, which can put pressure on financial markets.

“Our updated proposals will deliver a clear increase in the level of resilience expected of UK MMFs while making sure they can continue to meet the needs of investors,” the FCA said.

The UK government also emphasized the international nature of the money market fund industry.

Officials said EU-domiciled money market funds continue to play an important role in UK financial markets and welcomed ongoing cooperation with European regulators.

Geopolitical Risks

Recent market events have highlighted why regulators are focused on the resilience of cash-management products.

LSEG Lipper March 3 data showed that investors poured $47.9 billion into global money market funds amid concerns over a conflict involving Iran, driving demand for safer assets.

U.S. money market funds drew $30.75 billion from investors, the data showed, the highest among major investment categories, as people sought safer assets amid market uncertainty.

As investors sought safer assets, they moved money out of stock funds. U.S. equity funds lost $9.6 billion, while international equity funds and U.S. technology funds each saw more than $1 billion withdrawn.

Globally, equity funds recorded outflows of $9.1 billion on March 2, the largest since mid-December.

Reuters contributed to this report.