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FCA dithers over property funds; extends enquiry to include long-term asset funds

City watchdog, the Financial Conduct Authority (FCA), has postponed its verdict on a possible reform of the rules for investing in property funds.

The FCA revealed its decision would not be announced until the third quarter of this year, at the earliest.

The watchdog has been investigating property funds after a number of them temporarily suspended withdrawals in 2019 on concerns that property assets could not be sold fast enough to meet redemption requests from investors.

The onset of the pandemic in March of last year raised further liquidity concerns, and several property funds had to suspend withdrawals until the dust settled.

The FCA is pondering whether to introduce notice periods of up to six months for withdrawals.

“The consultation on the liquidity mismatch on property funds, with its proposals to put in place a notice period for redemptions, was controversial not least because of the operational challenges that it clearly presented and the very real risk that it would have potentially caused property funds to once again suspend as investors rushed to exit before any notice periods kicked in. The news that the FCA is delaying the conclusion of the consultation and linking it in to a consultation on Long Term Asset Funds shows just how hard property asset managers have lobbied for the FCA to take a different approach,” said Ryan Hughes, the head of active portfolios at AJ Bell.

Long Term Asset Funds (LTAFs), described as “private equity for the masses”, are the latest wheeze of the chancellor of the exchequer, Rishi Sunak.

“However, the initial proposals haven’t been completely discounted and may well still come back on the table when the FCA reports back later in the year. The simple fact that two property funds remain suspended and have been for over a year, while many others hold more than 20% cash to meet potential short-term redemptions still implies that the current structure needs addressing sooner rather than later. Rolling the review into a broader one on long term assets is sensible in that it is looking broader than just property but the thousands of investors that currently have around £12bn in commercial property funds will surely want clarity on the liquidity rules sooner rather than later,” Hughes said.

Moira O’Neill, the head of personal finance at interactive investor has wondered what benefits prospective investors will receive in exchange for restrictions on accessing their money.

“While these proposals require open-ended funds to match the underlying liquidity of the assets in which they invest with the redemption terms that they offer to investors, there is no guarantee that this approach will be entirely successful when it comes to managing liquidity risks,” O’Neill said.

“We have to ask if open-ended funds want the right to invest in illiquid assets without the accompanying obligation to offer daily access to their own investors, what do investors get in return for that sacrifice? The fixation on open-ended funds when it comes to illiquid assets is bewildering. Investment trusts come with their own concerns, such as discount or premium issues but they can be fully invested, and investors can buy or sell at the beat of their own drum, not someone else’s.

“We also note the proposals look to limit distribution to professional investors and sophisticated private investors, or those who have taken advice. It is easily forgotten that many retail investors are the end beneficiaries of professional investors through pension providers, wealth managers and financial advisers. We would be interested to know how many people in frozen property funds were there because they took ‘advice.’ If the regulator is to push ahead with a Long-Term Assets Fund, it must also protect consumers’ interests. Passing the buck onto sophisticated investors and advisers strikes the wrong chord,” she declared.

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