The Financial Conduct Authority (FCA) is looking to introduce redemption notice periods for UK open-ended property funds as it seeks to address ongoing concerns around liquidity.
The proposed new law, set out in a consultation paper launched today, would require investors to give notice of at least 90 days 鈥� and potentially up to 180 鈥� before their investment is redeemed.
The FCA said it was seeking to 鈥渞educe the potential for harm to investors from the liquidity mismatch in open-ended property funds鈥�.
It is the latest move to reform the fund sector, which has been dogged by redemption freezes 鈥� during the global financial crisis, following the EU referendum in 2016 and this year during the COVID-19 pandemic. Last year, the FCA launched new rules due to come into force next month that require funds to suspend trading when there is 鈥渕aterial uncertainty鈥� about the valuation of at least 20% of their portfolios.
Industry bodies 鈥� including the UK Association of Real Estate Funds (AREF) 鈥� have welcomed today鈥檚 consultation, but concerns have been raised about arbitrary duration of the proposed notice periods.
The Association of Investment Companies (AIC), which earlier this year published a paper raising concerns about the inherent mismatch in holding illiquid assets in vehicles that provide daily dealing 鈥� described the FCA鈥檚 proposals as a 鈥渟tep in the right direction鈥�.
But Ian Sayer, CEO of the AIC, said the 鈥渁rbitrary鈥� 90/180-day period 鈥渕eans that this will only help to reduce the problems arising from liquidity mismatches, not seek to eliminate them鈥�.
John Forbes, a leading consultant on UK property fund structures, said notice periods were 鈥渢he simplest way of achieving a greater match between the liquidity of units and the liquidity of underlying assets鈥�, but he was disappointed that the FCA continued to seek a 鈥渙ne-size-fits all solution鈥� to the problem.
He said: 鈥淭he liquidity of underlying assets could be very different: 180 days might be excessive time to sell a flat but insufficient to sell an airport.鈥�
Arbitrary notice periods can also be 鈥減roblematic for many funds 鈥� particularly if the platform architecture for retail investors cannot accommodate this鈥�, Forbes added.
Sayer said a better approach might be to set the notice period at 12 months 鈥� as is done in Germany 鈥� and allow managers to reduce this period 鈥渨hen they can certify that this is appropriate鈥�.
A number of funds suspended redemptions earlier this year, but Forbes highlighted that the recent fund suspensions were not down to any 鈥渓iquidity mismatch鈥�.
He said: 鈥淭he funds had the liquidity; the issue was valuation uncertainty and the application of a specific FCA policy to apply in such circumstances. Notice periods do not help solve valuation uncertainty.鈥�
The FCA said fund suspensions 鈥渆xist to protect investors in exceptional circumstances鈥� but it was concerned that it had 鈥渟een repeated suspensions of these funds over recent years for liquidity reasons, which suggests that there may be wider problems鈥�.
It added that 鈥渢he current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress鈥�.
The FCA said it would publish a policy statement with final rules as soon as possible in 2021. The consultation remains open to responses until 3 November 2020.
