FCA launches consultation on new rules for open-ended property funds
British financial watchdog FCA is consulting until 3 November 2020 on proposals aimed at addressing liquidity mismatch issues in open-ended property funds. UK-domiciled real estate funds had been severly hit in 2016 after the Brexit vote which had led asset managers to freeze redemptions. Similar procedures were implemented in early 2020 due to the Covid-19 outbreak. The new rules would require investors to give notice – potentially of up to 180 days - before their investment is redeemed.
The FCA believes repeated suspensions of British real estate funds over recent years for liquidity reasons may hide wider problems. It expressed its concerns around the fact that the current proprerty fund structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress. "This can potentially harm those who remain if the fund suspends or assets are sold rapidly due to liquidity demands. The proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions that are requested. It would also enable greater efficiency within these products as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions," said the FCA.
Christopher Woolard, FCA's interim chief executive, said that the new rules could help to achieve the regulator's goals in the field of consumer protection "by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers."
‘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."
The FCA specified that it will publish a policy statement with final rules as soon as possible in 2021.