The UK's Financial Conduct Authority is asking interested parties to comment on its proposals to curb 'liquidity mismatches' in open-ended property funds. It wants to require investors to give perhaps as much as 180 days' notice to their fund managers before they redeem their investments.
Fund managers often hold large cash balances to cover themselves against the shock of their investors choosing to redeem their investments at short notice. The FCA argues that the act of holding these cash balances is inefficient and reduces returns to investors, so a new set of rules that stops these investors from redeeming early will benefit them in the long run.
Consultative paper 20/15 is of primary importance to: the managers of British property funds, constituted as non-UCITS retail schemes; depositaries of these funds; feeder funds that invest in these property funds; master funds that invest in the property in which which these funds invest in; the providers of ancillary service; the providers of investment services that offer access to these funds, including Self-Invested Personal Pension (SIPP) and Small Self-Administered Scheme (SSAS) providers; distributors of these funds; investment intermediaries who advise on or invest in these funds; unit-linked insurers who offer insurance contracts linked to these funds; and discretionary fund managers or DFMs.
Open-ended funds let investors pool their contributions, share in the profits/income made by the assets that they hold and have access to investment expertise. They issue new units to investors and redeem investors’ existing units on demand. This seems to be about to change.
In September the FCA imposed new rules (enumerated in policy statement 19/24) for open-ended funds that invest in inherently illiquid assets. They require funds to provide investors with clear and prominent information about 'risks' that pertain to liquidity and the circumstances in which access to their funds may be restricted. They also require the managers of funds that invest in inherently illiquid assets to draw up and keep adding to plans to manage these risks. In PS19/24, the FCA promised to do something about the use of notice periods - a policy that is now coming to fruition.
This is largely a damage-limitation exercise on behalf of the FCA's reputation. When the LF Woodford Equity Income Fund suspended dealing in June last year there was a chorus of disapproval over the FCA's failure to act in this and other scandals, with its CEO of the day facing accusations of being "asleep at the wheel." Since Woodford, the FCA has been anxious to put a stop any more incidents occurring that involve illiquid assets held in open-ended funds, especially after its shortcomings in the regulation of illiquid funds culminated in the suspension of the £2.5 billion M&G Property Fund in December.