The Financial Conduct Authority began its consultation on allowing retail funds authorized in the U.K. to use side pockets — accounts that fund managers can use to structure their funds and separate riskier investments.
The proposal would allow fund managers to separate Russian and Belarusian investments from the rest of their portfolio if they cannot be sold outright because of the range of Western government sanctions imposed on the two countries after the invasion of Ukraine.
The watchdog has not specified when it would put the proposals into effect or how long the proposed changes would continue.
"We want the U.K. authorized retail funds with exposure to affected investments to be resilient and to operate in a way in which all investors are treated fairly," the regulator said. "We also want new investors to have confidence that they can invest into the funds without gaining exposure to Russian and Belarusian assets."
The financial watchdog said in its consultation paper that the so-called side pockets would be available only for investments subject to financial sanctions by Britain, the EU, Canada, and Japan.
The war against Ukraine has affected investments including securities issued by sanctioned companies, assets traded on stock exchanges linked to Russian companies, and bonds issued by Russian, Belarusian and Ukrainian organizations.
The regulator said it would consider the proposal successful if funds that have stopped trading because of sanctions reopened and other funds with affected investments used side pockets. The FCA also said that it would have been a success if it found evidence investors were more confident.
Funds that hold assets affected by the war in Ukraine, such as a bond held by a sanctioned Russian organization, might be unable to produce accurate prices for investors. This could result in some investors being unfairly treated.
Some funds have responded to this by completely suspending dealing, preventing investors from investing or redeem their assets in the funds.
The regulator is looking to consult with fund managers and their customers, as well as people professionally involved in the bond market, such as depositaries, investment service providers, and insurers.
Fund distributors and investment intermediaries will also be consulted on the proposed regulation changes.
The consultation is due to end on May 16.
The proposals were announced in March as Chancellor Rishi Sunak told British firms to "think very carefully" about dropping investments in Russia.
The London-based securities broker Sova Capital, owned by Russian banker Roman Avdeev, also applied for insolvency in March after Western sanctions caused it to suffer a shortage of liquidity.
--Additional reporting by Najiyya Budaly. Editing by Joe Millis.
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