The Financial Conduct Authority (FCA) is looking to introduce redemption notice periods for UK open-ended real estate funds as it seeks to address lingering concerns over liquidity.
The proposed new law, set out in a consultation paper launched today, would require investors to give at least 90 days’ notice – and potentially up to 180 – before their investment is repaid.
The FCA said it was seeking to “reduce the potential for harm to investors from liquidity mismatches in open-ended real estate funds.”
This is the latest initiative to reform the fund industry, which has been hampered by the freeze on buybacks – during the global financial crisis, following the EU referendum in 2016 and this year during the pandemic. COVID-19. Last year, the FCA launched new rules due to go into effect next month that require funds to halt trading when there is “significant uncertainty” about the valuation of at least 20% of their funds. wallets.
Industry bodies – including the British Association of Real Estate Funds (AREF) – welcomed today’s consultation, but concerns have been expressed over the arbitrary length of the proposed notice periods.
The Association of Investment Firms (AIC), which released a paper earlier this year raising concerns about the inadequacy inherent in holding illiquid assets in vehicles that allow day-to-day transactions, called the proposals the FCA of “not in the right direction”.
But Ian Sayer, CEO of AIC, said the “arbitrary” period of 90/180 days “means it will only help reduce problems resulting from liquidity mismatches, not eliminate them.”
John Forbes, a leading consultant on UK real estate fund structures, said notice periods were “the easiest way to achieve a better match between the liquidity of the units and the liquidity of the underlying assets” , but he was disappointed that the FCA continued to seek a “one-size-fits-all” solution to the problem.
He said: “The liquidity of the underlying assets could be very different: 180 days could be too much time to sell an apartment but insufficient time to sell an airport.”
Arbitrary notice periods can also be “problematic for many funds – particularly if the platform architecture for retail investors cannot accommodate this,” Forbes added.
Sayer said a better approach might be to set the notice period at 12 months – as is done in Germany – and allow managers to reduce that period “when they can certify that it is appropriate”.
A number of funds suspended redemptions earlier this year, but Forbes stressed that recent fund suspensions were not due to “liquidity mismatch.”
He said: “The funds had the cash; the problem was the uncertainty of the assessment and application of a specific FCA policy to be applied in such circumstances. Notice periods do not help resolve valuation uncertainty.
The FCA said that fund suspensions “exist to protect investors in exceptional circumstances”, but feared that it “had” seen repeated suspensions of these funds in recent years for liquidity reasons, suggesting that ‘there could be broader issues.’
He added that “the current structure could put some investors at a disadvantage because it encourages investors to be the first to exit in times of stress.”
The FCA has said it will issue a policy statement with final rules as soon as possible in 2021. The consultation remains open for responses until November 3, 2020.