FCA's Planned Property Funds Shakeup Draws Welcome

Tom Burroughes

4 August 2020

The UK’s main financial regulator proposes to require investors to give 180 days’ notice of pulling money out of an open-ended property fund, a measure designed to stop the problem of these funds being hit by mass pull-outs amid volatile markets.

The proposal that investors should give of up to six months’ notice to facilitate a redemption appears to be a sensible and practical way to avoid funds having to close at short notice and for extended periods due to liquidity issues.”

“For the retail investor, bricks and mortar property funds should only form that part of their portfolio to which they do not require easy access with other more liquid funds being available for emergency and short-term spending. It may be necessary to waive this notice period for property funds held in estates as HMRC would normally require any IHT to be settled within this timeframe and executors could not gain probate prior to settling any IHT,” Ingram.

James McManus, chief investment officer, Nutmeg, said: “For many professional investors, it won’t come as a surprise that the FCA is looking to take action on the mismatch between the promised liquidity of open-ended property funds and the liquidity they offer in reality – what is surprising is how long it’s taken. The issue of the liquidity mismatch and the suitability of these investments for retail investors has been a long time in the making, as the industry has refused to take meaningful steps to protect consumers. The coronavirus pandemic and subsequent gating of property funds has once again highlighted the issue, but it is not the first time retail investors have been unable to redeem money from investments marketed as having daily liquidity.”

Mergers
The FCA said that its proposed notice period will give managers scope to plan sales of property assets and meet redemption calls, as well as make the market work more efficiently.

‘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,” Christopher Woolard, interim chief executive of the FCA, said.

“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,” Woolard said.

The FCA will publish a policy statement with final rules as soon as possible in 2021. The consultation remains open until 3 November.