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CP20/15: Liquidity mismatch in authorised open-ended property funds

Today, 3rd August, the FCA announced that it was consulting on measures to address the potential harm caused by a mismatch in liquidity in certain UK authorised funds that invest directly in property. The FCA is consulting on a suggestion to introduce notice periods of up to 180 days for redemptions from such funds. The proposals are to apply to UK authorised property funds in which retail investors can invest, constituted as Non UCITS Retail Schemes (NURS). The consultation runs until 3rd November 2020.

 

You can find the consultation document here.

 

This consultation is part of an ongoing process since the suspension of open-ended property funds in the immediate aftermath of the EU referendum in 2016. The FCA published its original consultation on open-ended property funds in February 2017 and the Association of Real Estate Funds published our indepenent review of fund behaviour after the EU referendum result in April 2017. You can find it here.

 

When new rules for NURS funds investing in illiquid assets, in particular the requirement to suspend in situations where there is valuation uncertainty over more than 20% of the assets, were published last year to come into effect in September this year, the proposals made it clear that there were further changes to come. This was further flagged in the Bank of England Financial Stability Report in December 2019 and the impending arrival of the consultation was announced by the FCA last month. Its appearance is not therefore a surprise.

 

The press release from the FCA accompagnying the consulation is a bit disingenuous to imply the current fund suspensions during the covid crisis are due to a liquidity mismatch. The funds had the liquidity to meet redemptions, 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.

The introduction of notice periods is the simplest way of achieving a greater match between the liquidity of units and the liquidity of underlying assets, but is still problematic for many funds particularly if the platform architecture for retail investors cannot accommodate this. Some of the practical problems noted in our 2017 AREF report, such as investment by ISAs, are flagged in the consultation but no solution is proposed as yet.

 

Overall, it is slightly disappointing that the FCA again want a "one size fits all" solution that does not give the retail investor greater choice, albeit that it is probably a better "one size fits all" solution than doing nothing.

 

The devil will again be in the detail, but the consultation runs until November so there is time for the industry to respond.

 

3rd August 2020

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You can find press coverage here.

 

 

This will be covered in an Investment Property Forum webinar "Open ended real estate funds under the spotlight" on 15th September which John is chairing. Details here