Financial Conduct Authority  

FCA warns on suitability of historic property advice

FCA warns on suitability of historic property advice

The City watchdog has warned advisers they will need to check the ongoing suitability of property funds for their clients if rule changes floated by the regulator go ahead.

Yesterday (August 3) the Financial Conduct Authority published a consultation paper floating rules which would require investors to give notice — potentially up to 180 days — before their investment is redeemed from an open-ended property fund.

The regulator said there was a “liquidity mismatch” between daily dealing and the underlying property held in such funds, claiming the notice period would allow the manager to plan sales of assets to better meet redemptions.

It would also enable greater efficiency within the funds as managers would be able to allocate more of the fund to property and less to a cash buffer to meet redemptions, the FCA said.

Although the City watchdog thought the proposals would “make these property funds better quality investments” in the long term, it added there could be situations where the notice period changed the assessment of whether the investment was suitable for certain clients.

It stated: “We are aware that investment intermediaries may have previously given advice to clients to invest in such funds. Where there is an ongoing advice relationship, they will need to consider the ongoing suitability of investments in such funds.

“Investment advisers will need to consider whether this is an issue for any of their clients, and, if so, raise it with them.”

Investment platforms who make open-ended property funds available on a non-advised basis were also warned they would need to consider the appropriateness of making such funds available — and how they were described — to retail investors.

Additionally, the consultation paper showed the rule changes could risk the funds being excluded from Isas.

It said: “Under current tax legislation, NURS only qualify to be Isa eligible under certain conditions. Because of this, these funds may no longer be qualifying investments for a stocks and shares Isa. 

“We are currently engaging with the Treasury and HMRC on whether our proposals would mean that the units or shares in property funds would no longer be [qualifying units] for the purposes of the stocks and shares component of an Isa.”

Self-invested personal pension providers would also be affected as they would face higher capital adequacy requirements if they hold property funds, which would be classed as non-standard assets if they rules go ahead as they would breach the 30-day withdrawal limit.

In the aftermath of the FCA’s announcement, experts warned the proposals could “spell the end” for retail investors in property portfolios as it could prompt advisers question the appropriateness of the products and make it “impossible” to hold property funds for the majority of clients in centralised investment propositions.