The Financial Conduct Authority (FCA) is looking to introduce redemption notice periods for UK open-ended property funds as it seeks to address ongoing concerns around liquidity.
The proposed new law, set out in a consultation paper launched today, would require investors to give notice of at least 90 days – and potentially up to 180 – before their investment is redeemed.
The FCA said it was seeking to “reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds”.
It is the latest move to reform the fund sector, which has been dogged by redemption freezes – during the global financial crisis, following the EU referendum in 2016 and this year during the COVID-19 pandemic. Last year, the FCA launched new rules due to come into force next month that require funds to suspend trading when there is “material uncertainty” about the valuation of at least 20% of their portfolios.
Industry bodies – including the UK Association of Real Estate Funds (AREF) – have welcomed today’s consultation, but concerns have been raised about arbitrary duration of the proposed notice periods.
The Association of Investment Companies (AIC), which earlier this year published a paper raising concerns about the inherent mismatch in holding illiquid assets in vehicles that provide daily dealing – described the FCA’s proposals as a “step in the right direction”.
But Ian Sayer, CEO of the AIC, said the “arbitrary” 90/180-day period “means that this will only help to reduce the problems arising from liquidity mismatches, not seek to eliminate them”.
John Forbes, a leading consultant on UK property fund structures, said notice periods were “the simplest way of achieving a greater match between the liquidity of units and the liquidity of underlying assets”, but he was disappointed that the FCA continued to seek a “one-size-fits all solution” to the problem.
He said: “The liquidity of underlying assets could be very different: 180 days might be excessive time to sell a flat but insufficient to sell an airport.”
Arbitrary notice periods can also be “problematic for many funds – particularly if the platform architecture for retail investors cannot accommodate this”, Forbes added.
Sayer said a better approach might be to set the notice period at 12 months – as is done in Germany – and allow managers to reduce this period “when they can certify that this is appropriate”.
A number of funds suspended redemptions earlier this year, but Forbes highlighted that the recent fund suspensions were not down to any “liquidity mismatch”.
He said: “The funds had the liquidity; the issue was valuation uncertainty and the application of a specific FCA policy to apply in such circumstances. Notice periods do not help solve valuation uncertainty.”
The FCA said fund suspensions “exist to protect investors in exceptional circumstances” but it was concerned that it had “seen repeated suspensions of these funds over recent years for liquidity reasons, which suggests that there may be wider problems”.
It added that “the current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress”.
The FCA said it would publish a policy statement with final rules as soon as possible in 2021. The consultation remains open to responses until 3 November 2020.
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