FCA eyes notice period change in open-ended property funds
The UK's Financial Conduct Authority (FCA) is consulting on proposals to reduce the "potential for harm to investors" from the liquidity mismatch in open-ended property funds, with a new notice period for withdrawals suggested.
The new rules as proposed would require investors to give providers notice - suggested as being between 90 and 180 days - before their investment can be redeemed.
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", the FCA said.
We hope the proposed new rules will directly address the liquidity mismatch of these funds," Christopher Woolard, interim CEO, FCA
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.
Christopher Woolard, pictured left, interim chief executive of 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 want open-ended funds to provide a structure through which investors can safely invest in less liquid assets which offer attractive expected returns and at the same time supports investment that benefits the wider economy.
"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."
'Sharp focus'
Ryan Hughes, pictured right, head of active portfolios at AJ Bell, said: "The liquidity mismatch that can occur in open-ended funds has been in
sharp focus since the Woodford debacle and property funds are where this problem most often rears its head. There is currently over £12.5 billion of investors' savings trapped in open-ended property funds that are suspended.
"The FCA's proposal to introduce a notice period for withdrawals from open-ended property funds is eminently sensible. It will ensure that property fund managers can manage their portfolios more effectively and give them time to sell properties in a controlled way in order to
meet redemptions.
"Perhaps more importantly it should also change the way investors view property funds. Property should be seen as a long-term investment but daily trading on these funds has led to investors assuming they can get their money back whenever they want whereas in reality this has not been the case in many instances.
Notice period
"Having a notice period of between 90 and 180 days should change this perception and means investors are less likely to get a nasty surprise when they want to withdraw their savings.
"Notice periods won't call a halt to all property fund suspensions because in times of severe market stress property managers still might not be able to sell properties quickly enough and there will still be the requirement from 30 September this year to suspend funds when there is uncertainty over the values of more than 20% of the portfolio. However, it would give managers greater flexibility to meet redemption requests and should change investor's perceptions of what to expect."
The FCA will publish a Policy Statement with final rules "as soon as possible in 2021". The consultation remains open to responses until 3 November 2020. The FCA also continues to engage with other stakeholders on considering new initiatives within the regulatory framework that would facilitate investments in long-term assets, it said.
