The Financial Conduct Authority (FCA) has criticised fund managers, providers and depositories for their handling of the liquidity crisis that hit the £35bn open-ended UK commercial property sector in the wake of the 2016 referendum on EU membership.
In its review of property funds and liquidity risks, released today, the FCA found failures in planning, communication, policies and procedures, which it said required "remediation measures" to ensure compliance with its expectations and requirements.
The regulator, which engaged with over 60 firms, found authorised fund managers (AFMs) "did not adequately plan, or have clear policies and procedures, for valuing their property portfolios under stressed market conditions".
In addition, some AFMs did not "adequately consider the implications of their distribution model" in their liquidity monitoring and management of funds.
"The AFMs could improve their communications to platform providers, to enable platforms to communicate more effectively in turn with advisers and end-customers," it said.
It also found the quality of liquidity monitoring and management varies between different property funds, and the valuation of real estate assets poses challenges under stressed market conditions.
"Firms could be clearer in their communications, including to end-customers, following significant market events," it said.
"We expect all firms that were affected by either the suspension of property funds or the application of fair value pricing (FVP) adjustments will - if they have not already done so - review how they dealt with this event," the FCA said.
"This should include examining relevant policies and procedures and considering whether there are any improvements that could be made that would enable them to deal more effectively with a similar market event."
Following last year's Brexit vote, a raft of open-ended property funds from the likes of M&G, Aviva Investors, Henderson Global Investors and Columbia Threadneedle were suspended as they struggled to cope with high levels of outflows.
Investors ditched the asset class in droves in anticipation of a market crash and drop in property prices.
As a result, in February the FCA invited discussions on whether regulatory intervention was needed for open-ended funds invested in illiquid assets.
Further to the above findings, the regulator's review found unit-linked providers (ULPs) also appeared to not "understand fully" the underlying portfolio of open-ended funds they were investing in, according to the FCA.
The report said the FCA found examples of poor governance over the unit-linked product range, such as "senior management lacking awareness and understanding of unit-linked mirror funds".
It added that ULPs neither managed their liquidity well nor effectively communicated deferrals, and their impact on regular contributions and contractual withdrawals to their customers.
Also, unit-linked funds holding real estate directly did not appear to manage their liquidity well.
ULPs took different approaches to informing customers but some issued no communications at all, the regulator said.
Meanwhile, noting that depositaries "appeared to provide an effective, independent check of AFMs' adherence to collective investment schemes sourcebook under normal market conditions", the FCA said there were also failures.
"They did not appear to have considered fully how they should fulfil their responsibilities under stressed market conditions," it said.