PropertyNov 3 2020

Fund managers flag concerns about proposed FCA rules

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Fund managers flag concerns about proposed FCA rules

Property fund managers have raised concerns over the City watchdog’s proposals to enforce a six-month redemption period, claiming the rules could reduce consumer choice and create problems for other parts of the market.

Earlier this year 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.

But some fund managers have raised red flags for how the rules would work in practice as the consultation comes to an end today (November 3).

A spokesperson from Columbia Threadneedle said the asset manager did not support the FCA’s proposals, arguing the rules would limit investors’ access to such portfolios.

The spokesperson said: “The proposed change would mean these funds become unavailable to retail investors, reducing customer choice and preventing access to an asset class that is an important risk and return diversifier and income-generator.

“Platforms, which play an integral part in fund distribution in the UK, require daily dealing, so those who invest via platforms (including investors in fund-of-funds, Sipps, DC pensions, multi-asset funds or model portfolios) would lose the ability to easily choose and integrate property into their portfolios.”

Meanwhile Legal & General Investment Management asked for “clarity” over the “significant volumes of investments” which had been made via platforms, model portfolios and Isas.

An LGIM spokesperson said: “For the regulation to be effective in retaining long term investment capital into UK real estate, it needs to work in harmony with these key elements of investment infrastructure.”

This is not the first time such concerns have been aired, with experts warning at the time that the FCA’s proposals could “spell the end” for retail investors in property portfolios.

It was not just property funds raising red flags over how the rules could play out in practice.

The Investing and Saving Alliance said the proposals floated by the FCA were not proportionate to the issue they were trying to solve, adding that the rules would “cause more consumer and industry detriment than they seek to remove”.

Renny Biggins, head of retirement at Tisa, said: “[The suspension method] provides a flexible and logical approach which means that outside of exceptional scenarios, the funds continue to operate as intended.

“The introduction of a notice period for all sales of these funds, irrespective of market conditions, will have significant consequences on all of those involved in the value chain including consumers, advisers, platforms, and property fund managers.”

Divided industry

Other stakeholders were more positive about the watchdog’s plans. Aberdeen Standard Investments agreed there were “potential issues” but stopped short of saying whether the fund house agreed with or refuted the regulator’s proposals, and pledged to work with the FCA.

Aviva said it was “very much supportive” of efforts to better align the structure of funds with the liquidity of the underlying assets but flagged that support from "across the industry" was needed to implement such a change without "unintended consequences".

There were also parts of the industry that felt the 180-day notice period would not go far enough to protect consumers from harm.

Ian Sayers, chief executive of the Association of Investment Companies, said although notice periods were the “right answer”, the 180 days was “not long enough” to sell properties in an orderly way in all market conditions.

He said the UK should mirror Germany, which has a one-year notice period, saying such a wait would "protect the integrity of markets, work for investors and is commercially viable.”

The problem

Issues surrounding illiquid holdings in property open-ended funds have been highlighted on several occasions in recent years, most notably by the suspension of all UK property funds available to retail investors, with £12.8bn of assets between them, in the third week of March.

The portfolios were gated because the coronavirus crisis had caused “material uncertainty” in the UK property market, meaning valuers were unable to value the assets within the funds with the same degree of certainty as would otherwise be the case.

The illiquid nature of property meant a reliable price was not always readily available. This also sparked a number of funds to gate in the wake of the EU Referendum.

High levels of redemptions can also cause a fund's suspension, such as when M&G suspended its £2.5bn property portfolio fund in December.

imogen.tew@ft.com

What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.