Managers running property funds face tough new rules about how their products are sold to retail investors and when they can gate the vehicles.
After the UK voted to leave the European Union in June 2016 dealing in several property funds was temporarily suspended.
This prevented investors from accessing their money, though dealing in all funds resumed by the end of the year.
Now, two years after the Brexit vote, the FCA has published a 79-page paper on proposals to avoid a repeat of panicked investors trying to pull cash from open ended funds containing illiquid assets.
Here are the three key things you need to know about what the FCA is proposing:
1) When to suspend trading
The FCA will require non-UCITS retail schemes (Nurs) holding property to suspend trading when the standing independent valuer expresses ‘material uncertainty’ about the value of 20 per cent of the fund.
The circumstances in which the FCA considers it may be appropriate to suspend dealing are also explained in the paper.
For a fund mainly investing in illiquid assets, the FCA said the fund manager may suspend dealing before running down the liquidity in the fund, if this is in unitholders’ best interests.
2) Rebadging of funds
Managers of funds that invest mainly in illiquid assets have been told to add an ‘identifier’ to the name of any relevant fund – a label, that will draw attention to the nature of the fund.
The regulator said fund houses must explain details of their liquidity risk management strategies, including the tools they will use and the potential impact on investors, in their fund prospectuses.
A standard risk warning will also have to be added to financial promotions relating to Property funds pushed at retail clients.
3) Rules on liquidity management
The regulator also said it will expect fund managers to improve liquidity management in open ended funds investing mainly in illiquid assets.
Fund managers will be required to produce contingency plans in case of a liquidity crisis and enhancing depositaries’ oversight of the liquidity management process.
The FCA also clarified how it expects firms to use some liquidity management tools.
For open ended funds investing mainly in illiquid assets, the FCA will now require more information to be disclosed about the liquidity risks, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors.
According to the FCA, this should make it less likely that consumers invest in funds that are not suitable for their needs.
The Association of Investment Companies (AIC) responded to the consultation paper on illiquid assets and open-ended funds by highlighting the benefits of closed-ended investment companies.
Ian Sayers, chief executive of the Association of Investment Companies, said: “Open-ended funds investing in property suffer from a fundamental liquidity mismatch.
"While it’s right that the FCA looks at a range of measures to protect consumers, the consultation paper ignores the elephant in the room, which is that the open-ended structure is never going to be ideal for an illiquid asset such as property.