The FCA has issued a new consultation in relation to a perceived liquidity mismatch for authorised property funds. The FCA, together with the Bank of England, has been reviewing the liquidity of open-ended funds since 2019 and the consultation is intended by the FCA to build on the new rules for open-ended funds investing inherently in illiquid assets as set out in the FCA’s policy statement (PS 19/24) from September 2019.
The proposed new rule changes would apply to Non-UCITS Retail Schemes (“NURS”) that invest 50% or more of its assets in immoveables (or in other schemes that invest in immoveables to the same extent). Where a NURS operates limited redemption arrangements, the NURS would only fall with the scope of the new rules where such arrangements provide for dealing in units in the NURS more frequently than the length of the FCA’s proposed new notice period (see below). Funds falling within scope of this definition would be defined as ‘funds predominantly investing in property’ (or “FPIPs”).
FPIPs would be required to operate using the following new dealing structure:
- Each investor’s redemption request would be received and recorded, then processed at the end of a notice period.
- The investor would receive the value of their investment, based on the unit price of the fund at the first valuation point following the end of their notice period.
- Redemption requests would be irrevocable, so that investors cannot place orders and withdraw them before the end of the notice period if market conditions change.
Whilst the FCA accepts that the proposed new rules would result in redeeming investors being subject to greater ‘market risk’ than under the current rules, the FCA believes that the introduction of this notice period is a fair way to balance the interests of all investors in the fund. It will further help investors appreciate that investing in FPIPs is a medium to long term investment.
The FCA is currently considering a notice period of either 90 days or 180 days for investors to redeem their units in FPIPs, but invite other suggestions.
The FCA acknowledges that FPIPs will be required to update the dealing provisions in the FPIP’s instrument and prospectus and has clarified that it would consider such changes to be treated as significant changes for the purposes of COLL 4.3R. Investors would therefore need to receive at least 60 days’ notice of the changes before they come into effect (but the changes would not require investor approval at an EGM).
The consultation closes on 3 November 2020. For further details, a copy of the consultation can be found here. We note that the Investment Association has announced that it will be holding a members meeting to gather the views of fund managers and depositaries on the consultation.