The Financial Conduct Authority has postponed its decision on notice periods for open-ended property funds while it looks into creating a new fund structure to address the issue.
The watchdog has released the results of its previous consultation on fund notice periods - which included a suggestion that investors in open-ended property funds could have to wait 180 days to get their money back.
But it has said it needs more time to receive feedback on a new structure it is proposing to solve the issue - the long-term asset fund (LTAF)
But this proposed new structure might also include notice periods, or limits on the amount of the fund that could be redeemed at any dealing point.
Mike Barrett, consulting director at the Lang Cat, said there was a real potential that property would become a "niche" asset class as a result of these changes.
“The majority of clients will still end up investing in a model portfolio, [in] which operationally I don't think there's a way you could introduce notice periods.
“So if you want or need to invest in property, you [would have to] go into a more bespoke service with the unintended consequences will be there will be less people investing in property as an asset class, and those that do will probably have to pay more to do it.”
The Association of Investment Companies has warned this consultation paper raises serious questions about investor protection.
Ian Sayers, chief executive of the AIC, said: “Recently introduced rules in the property sector require a fund to be suspended when there is material uncertainty over the valuation of its assets. As the FCA said at the time, this is an important investor protection measure, because where such uncertainty exists, it is not possible for the manager to set a fair price for investors entering or leaving the fund.
“We are concerned that these rules will not apply to the LTAF. Is this because material uncertainty over valuations could be a permanent feature of an LTAF, given the very illiquid and complex assets that it could invest in?
“This does not just raise the anomaly that existing funds investing in property would be subject to the material uncertainty protections, but an LTAF investing in property would not. There is a much more fundamental issue. If the assets of an LTAF are always subject to material uncertainty over valuations, then how can investors know that the price set by the manager is a fair one?”
Moira O’Neill, head of personal finance at Interactive Investor, highlighted concern over the proposal's mention of limiting distribution to professional investors and sophisticated private investors, or those who have taken advice.
She said: “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 LTAF, it must also protect consumers’ interests. Passing the buck onto sophisticated investors and advisers strikes the wrong chord.”
Ryan Hughes, head of active portfolios at AJ Bell, said that the delay to the conclusion of the consultation and linking with the LTAF consultation shows how hard property asset managers have lobbied for the regulator to take a different approach.
“The simple fact that two property funds remain suspended and have been for over a year, while many others hold more than 20 per cent cash to meet potential short-term redemptions still implies that the current structure needs addressing sooner rather than later."
sally.hickey@ft.com
