The Financial Conduct Authority (FCA) is mulling a plan that would require investors in open-ended property funds to give up to 180 days notice before their investments are redeemed, the regulator said on Monday.
The plan would see relevant funds’ redemption requests ‘received and recorded, then processed at the end of the notice period,’ the watchdog said, with the final redemption price taking place at the end of the notice period.
Such an initiative aims to address the long-running structural issues within UK property funds, which have been hit by a spate of fund suspensions in recent years. 80% of open-ended property funds in the sector, totalling more than £10bn in assets under management, remain suspended due to the uncertainty in valuing the assets during the pandemic.
‘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,’ said Christopher Woollard, interim CEO of the FCA. ‘We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress.’
The consultation is open until 3 November 2020, and the FCA said it welcomes feedback and is keen to hear suggestions for alternative measures that may achieve the same outcome. It will then publish a policy statement with final rules as soon as possible in 2021.
Non-UCITS Property funds, as well as other non-UCITS retail schemes (NURS) investing in inherently illiquid assets (FIIAs), will also be subject to new rules that come into force on 30 September, with funds forced to suspend when there’s material uncertainty over the valuation of more than 20% of their assets.
The 180-day notice period would be in addition to these rules, and underlines just how seriously the FCA is taking fund liquidity risks given the recent market tumult.
Such rules could radically shake-up UK property funds over time, with funds likely to resemble private equity funds. As well as being generally less accessible to retail investors, funds wouldn’t need to hold the same levels of cash to meet near-term redemptions.
This illiquidity premium should, in theory, mean better returns for investors over the long-term. But advisers have warned that many retail investors will shun open-ended property funds if the new rule were introduced, while others raised concerns about the difficulty of investing clients’ money, particularly if they’re redeeming at different times. That could make such funds a bespoke or niche solution, depriving investors of their diversification benefits.
Whatever the case, AQMetrics will be watching the consultation process closely to see how it unfolds. And, if necessary, AQMetrics will implement the emerging regulatory change in its platform as per its regulatory change methodology.