Regulator undecided on property funds
In August 2020, the FCA consulted on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds. The potential for harm arises because the offer of frequent (typically daily) dealing in units of some property funds is not aligned with the time that it takes to sell the underlying assets in which the funds invest.
To address this, the FCA consulted on whether property funds should be required to have notice periods before an investment can be redeemed. It suggested a notice period of between 90 and 180 days for these funds, and also asked for any alternative proposals.
The FCA said this approach would have a number of benefits including reducing the risks to fund investors and the wider economy of pressure to sell fund assets at speed, rather than maximum price, in order to meet redemption requests. It would also allow funds to be more efficient, enabling them to hold less cash to manage the liquidity mismatch, and therefore boost investors’ returns.
The regulator received 70 responses from a wide range of stakeholders, including fund managers and depositaries, life assurance providers, and those involved in the distribution chain, as well as individual investors.
Stakeholders raised concerns around the operational challenges for fund managers and other firms, in particular in relation to ensuring that the infrastructure to support purchase and sale of holdings by retail investors will work seamlessly with notice periods. Some of these operational challenges also need to be addressed to make progress on new options for a long-term asset fund (LTAF).
The FCA has now launched a consultation on LTAFs and won’t take a final decision on its policy position on property funds until Q3 2021 at the earliest, so that it can take feedback to the LTAF consultation into account.
The FCA said that if it proceeds with applying mandatory notice periods for property funds, it will allow a suitable implementation period before the rules come into force, approximately 18 months to two years, to allow firms to make operational changes.
Ryan Hughes, head of active portfolios at AJ Bell, said: “The consultation on the liquidity mismatch on property funds, with its proposals to put in place a notice period for redemptions, was controversial not least because of the operational challenges that it clearly presented and the very real risk that it would have potentially caused property funds to once again suspend as investors rushed to exit before any notice periods kicked in.
“The news that the FCA is delaying the conclusion of the consultation and linking it in to a consultation on long term asset funds shows just how hard property asset managers have lobbied for the FCA to take a different approach.
“However, the initial proposals haven’t been completely discounted and may well still come back on the table when the FCA reports back later in the year. The simple fact that two property funds remain suspended and have been for over a year, while many others hold more than 20% cash to meet potential short-term redemptions still implies that the current structure needs addressing sooner rather than later. Rolling the review into a broader one on long term assets is sensible in that it is looking broader than just property but the thousands of investors that currently have around £12bn in commercial property funds will surely want clarity on the liquidity rules sooner rather than later.”