FCA consults on new rules to improve open-ended property fund structures

The FCA is consulting on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds.

The new rules as proposed would require investors to give notice — potentially of up to 180 days — before their investment is redeemed.

Any feedback is welcomed by the regulator and is keen to hear suggestions for alternative measures that might achieve the same outcome.

At present, investors in these funds can buy and sell units on a frequent, often daily, basis, but the underlying property in which these funds invest cannot be bought and sold at the same frequency, which creates a liquidity mismatch. 

When too many investors simultaneously redeem their investments, a fund manager may need to suspend dealings in the units of the fund because of the liquidity mismatch between the fund units and the underlying property assets. 

The illiquid nature of property also means that a reliable price is not always readily available and, in some market conditions, the fund units cannot be priced with confidence. 

This can also lead to a need to suspend dealings in fund units.

Property fund suspensions have occurred with increasing frequency in recent years, including following Brexit  and in the current coronavirus pandemic.

The FCA is concerned that the current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress. 

This can potentially harm those who remain if the fund suspends or assets are sold rapidly due to liquidity demands.

The proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions that are requested. 

It would also enable greater efficiency within these products as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions.

Christopher Woolard, interim chief executive at the FCA, said: “We think that our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.

“We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress and allowing them to operate in a way that all investors are treated equally.”

The FCA will publish a policy statement with final rules as soon as possible in 2021. 

The consultation remains open to responses until 3rd November 2020.

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