The Financial Conduct Authority (FCA) has proposed steps to address the liquidity mismatch in open-ended investment funds that has led to numerous fund suspensions in recent years, including the implementation of a 180-day notice period for consumers redeeming investments.
Open-ended property funds across the IA Direct Property sector are currently suspended owing to material uncertainty in valuing their assets amid the fallout from the coronavirus pandemic.
However, previous waves of suspensions, notably including the one seen in the wake of the 2016 Brexit referendum, were linked to mass redemptions that managers were unable to facilitate as a result of the inherently illiquid nature of the funds' underlying assets.
Open-ended funds have been under the scrutiny of the FCA and the Bank of England for some time, with the regulators previously suggesting notice periods and swing pricing as possible remedies for their "structural mismatch".
Previous changes to open-ended funds mean that from 30 September, authorised property funds will be forced to suspend when there is material uncertainty over the valuation of more than 20% of their assets.
The FCA now argues that investors in UK authorised property funds, registered as non-UCITS retail schemes (NURS), should be subject to a notice period of 90 to 180 days when withdrawing their capital.
In a consultation paper published today (3 August), the FCA argued that the imposition of a notice period would mean fund managers "could plan sales of property assets so that it could meet redemptions as they fall due", meaning that managers "better able to plan when to invest or to make asset sales without needing immediately to meet any unexpected requests".
The FCA also said the change would mean property funds "could tolerate holding less cash than they do currently", with the relatively high average cash weightings having been a contentious aspect of the sector in recent years, "enabling this money to be invested into property or other permitted assets".
"It would also send a clear signal to investors in these property funds that they are intended for medium-term to long-term investment," the FCA said.
"Future investors would better understand that these funds do not truly offer daily, monthly or even quarterly liquidity.
The FCA conceded that the change would not "necessarily solve all the liquidity issues in property funds, or mean that such funds would never suspend dealings", warning that in periods of "severe market stress" the notice period "may still not be sufficient to give fund managers time to sell the necessary property".