The Financial Conduct Authority (FCA) has put forward proposals that could transform the UK’s open-ended property fund industry and how it responds to market downturns.
The UK’s financial regulator has been seeking to reform the sector following a series of liquidity issues in the aftermath of the global financial crisis and the Brexit vote in 2016.
Eighteen months after publishing a discussion paper, the FCA has proposed that open-ended funds should suspend trading “when the independent valuer expresses uncertainty about the value” of illiqid assets, or “immovables”, such as real estate.
The FCA has also proposed requirements to disclose more information to investors about the liquidity risks in funds and how investors could be affected if funds need to be ‘gated’.
Other proposals include requiring fund managers to establish contingency plans “in case of a liquidity risk crystallising” and the use of depositaries to oversee liquidity management.
The regulator is also considering creation a new category of vehicles called funds investing in inherently illiquid assets (FIIAs).
The proposals are aimed at protecting retail investors, which often gain access to property funds through platforms that require daily dealing.
But it could also have implications for institutional investors that have exposure to open-ended property funds – some existing funds contain a mixture of retail and institutional capital.
And John Forbes, an independent consultant, said “the development of new types of funds for retail investors could facilitate investment” by defined contribution pension schemes.
Forbes, who has produced reports on the evolution of property funds for the Association of Real Estate Funds (AREF), welcomed the announcement, saying the FCA’s “broad conclusions” were in line with his most recent report published last year.
The report concluded that “fund managers acted appropriately within the regulatory framework and that the parts of the regulation that did not work were fairly limited in extent”, he said.
“I think that it is also good news that this is a consultation that runs until January so the industry can respond to the detail of the proposals.”
However, he added, “my main disappointment is that the opportunity to make changes to facilitate the development of new, less liquid funds has not been taken”.
Last year’s report called for “measures to permit the development of a broader range of listed and unlisted vehicles with different liquidity characteristics would give retail investors greater choice”.
Melville Rodrigues, partner at law firm Charles Russell Speechlys, also welcomed the proposals, “in introducing appropriate protections for investors… particularly under stressed market conditions”.
He said they should help investors better understand fund products, and “reduce the risk of some investors gaining at the expense of others due to uncertainty about the value of the fund assets, and hopefully reduce the likelihood of a run on the fund”.
