FCA to improve open-ended property fund structures

The FCA has announced it is consulting on plans to reduce the potential for harm to investors from the “liquidity mismatch” in open-ended property funds.

Proposed new rules would require investors to give notice – potentially of up to 180 days – before their investment is redeemed.

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

When too many investors simultaneously redeem their investments, the FCA indicated that 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. The FCA said that this can also lead to a need to suspend dealings in fund units.

“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,” said FCA interim chief executive, Christopher Woolard.

“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.”

Property fund suspensions have become more common in recent years, including in the aftermath of Brexit and at present during the ongoing coronavirus pandemic.

Responding to the FCA's proposals, AJ Bell head of active portfolios, Ryan Hughes, commented: “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 £12.5bn 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.”

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