FCA statement on its work on liquidity mismatch in authorised open-ended property funds

In August 2020 the FCA consulted on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds.

The potential for harm arises because the offer of frequent (typically daily) dealing in units of some property funds is not aligned with the time that it takes to sell the underlying assets in which the funds invest.

To address this, we consulted on whether property funds should be required to have notice periods before an investment can be redeemed. We suggested a notice period of between 90 and 180 days for these funds. We also asked for any alternative proposals.

This approach would have a number of benefits including reducing the risks to fund investors and the wider economy of pressure to sell fund assets at speed, rather than maximum price, in order to meet redemption requests. It would also allow funds to be more efficient, enabling them to hold less cash to manage the liquidity mismatch, and therefore boost investors’ returns.

We have published the feedback to the consultation and are updating on next steps.

We received 70 responses from a wide range of stakeholders, including fund managers and depositaries, life assurance providers, and those involved in the distribution chain (transfer agents, platforms, advisers, wealth managers, property valuers and pensions specialists), as well as individual investors.    

Stakeholders raised concerns around the operational challenges for fund managers and other firms, in particular in relation to ensuring that the infrastructure to support purchase and sale of holdings by retail investors will work seamlessly with notice periods. Some of these operational challenges also need to be addressed to make progress on new options for a Long-Term Asset Fund (LTAF).

We have launched a consultation on LTAFs. We will not take a final decision on our policy position on property funds until Q3 2021 at the earliest, so that we can also take feedback to the LTAF consultation into account.

We will continue to work with industry stakeholders, including through the Productive Finance Working Group (PFWG) set up by the FCA, Bank of England and HM Treasury to overcome these operational barriers. 

If we do proceed with applying mandatory notice periods for property funds, we will allow a suitable implementation period before the rules come into force, approximately 18 months to 2 years, to allow firms to make operational changes.