FCA consultation suggests potential open-ended property funds split
The UK’s Financial Conduct Authority has launched a discussion paper about risks created when consumers use open-ended funds, such as property funds, to gain exposure to assets that may be difficult for the fund manager to buy, sell or value quickly.
The FCA said via a statement earlier today that it has launched a consultation paper into the risks and appropriateness of ‘illiquid assets’ that may include land and buildings, infrastructure, and financial assets such as unlisted securities.
One area that the paper discusses is the possibility of general retail investors money being split from that invested by professional investors such as discretionary fund managers. To “stimulate debate”, in its paper the regulator gives some examples of “possible policy approaches” that it might use to solve the party fund conundrum. It suggests that the idea that professional and institutional investors may hold a “significant or even predominant” portion of a portfolio, is potentially disadvantaging retail investors.
‘Retail and professional investors split’
“Some commentators suggest [the status quo] is unsatisfactory for retail investors, because their interests may be different to those of professional investors, ” the FCA’s consultation paper said. “To protect the interest of retail investors better, one approach would be to have rules that prevent the investment of both retail and professional investors’ monies in the same fund.”
The FCA probe has been triggered follows a collapse in the UK property market last summer in the aftermath of the Brexit vote, with, as reported, many of the largest open-ended property fund providers imposing blocks on investors accessing their funds due to plunging prices and a rush of investors wishing to move finds out of the assets.
After a period of a few months most providers were able to lift the sanctions, but the situation raised the question about appropriateness of open-ended property funds and whether or not retail investments into property should be restricted to closed-ended vehicles.
“With this discussion paper, we aim to gather evidence to decide whether more (or different) rules and guidance are needed to support market stability and protect consumers, without preventing them from having access to a diversified range of investment opportunities,” the FCA said.
The FCA said that it wants stakeholders to tell them what problems they think exist where open-ended funds hold illiquid assets, how well the current rules address those problems and what further regulatory intervention might be needed.
“Open-ended funds investing in illiquid assets may experience difficulties if investors expect to be able to withdraw their money quickly and at short notice,” the FCA statement said. “Many funds offer daily dealing opportunities to investors, but hold assets that are not revalued on a daily basis. This creates a tension, as assets cannot be sold in a day to meet daily redemption requests.