Financial Conduct Authority  

FCA floats separating DFM and retail property assets

 FCA floats separating DFM and retail property assets

Asset managers running property funds could be forced to separate retail investors' money from that invested by the likes of discretionary fund managers (DFMs), according to one approach floated by the FCA as a way to tackle liquidity mismatch issues.

In a discussion paper on illiquid assets and open-ended investment funds - prompted by the raft of property funds that suspended redemptions in the aftermath of last summer's EU referendum -  the regulator warned that professional and institutional investors may hold a "significant or even predominant" portion of a given portfolio, potentially disadvantaging retail investors.

As a result, the FCA has raised the idea of splitting “retail” and “professional” investor assets. Its paper did not precisely define the two terms, but a spokesman for the watchdog said the likes of discretionary wealth managers were classified as professional investors.

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"Some commentators suggest [the status quo] is unsatisfactory for retail investors, because their interests may be different to those of professional investors. To protect the interest of retail investors better, one approach would be to have rules that prevent the investment of both retail and professional investors' monies in the same fund," the paper said.

The regulator - which suggested other approaches including beefing up the liquidity requirements for funds - acknowledged such a measure could have drawbacks, such as the need for "significant restructuring" of existing products and the potential to deter future fund launches in the space.

It said another approach would be to ensure retail and professional investor money was held in different share classes. But the watchdog ruled out banning open-ended funds from holding illiquid assets, or preventing retail investors from buying open-ended property funds.

The paper said: "A few funds apply different dealing frequencies and notice periods to these classes, on the basis that retail investors mostly deal in low-value amounts that the fund’s liquidity buffer can easily cover. The typically larger size of professional investor deals may have a more significant impact on liquidity, so they may need to be managed over a longer timescale."

"We could issue guidance to clarify our expectations, or challenge managers through our supervisory and fund authorisation processes if they do not put appropriate class structures in place. However, this would require careful consideration of the unintended consequences...and of allowing retail investors to have a possible first-mover advantage over professional investors."


The FCA also raised concerns that platforms had been too slow to react as funds suspended redemptions last July.

“There is evidence that some platforms were operationally unprepared to respond promptly when property fund managers applied exceptional measures in July 2016,” said the paper.

International proposals

The regulator's discussion of potential improvements rebuffed recommendations made by the Financial Stability Board that regulators could “provide direction in extraordinary circumstances” about open-ended funds’ use of liquidity risk management tools.

“This intervention would address the risk to financial stability that might be caused by fund managers’ reluctance to suspend their funds. In particular, there is a concern that funds could be forced into a situation where they have to ‘fire-sell’ assets at very low prices to be able to meet redemption requests,” the FCA said.