A Financial Conduct Authority move to tackle liquidity mismatch in open-ended property funds could see the products lose their eligibility to be included in stocks and shares Isas.
The FCA is seeking feedback on a new notice period of between 90 and 180 days, according to a consultation published on Monday morning. Feeder funds would also have to abide by the new notice period.
The regulator said the current daily dealing structure favoured by most funds in the Investment Association UK Direct Property sector encourages first mover advantage and disadvantages those who remain in the fund.
In the aftermath of the coronavirus, a raft of UK direct property funds suspended as independent valuers were hit by material uncertainty regarding valuations. In September, new FCA rules will mean funds where there is material uncertainty on more than 20% of the portfolio would have to suspend. Asset managers decided to abide by the rule even though it had not yet come into effect.
In its consultation, the FCA said it considered 90 days to be an appropriate time frame, noting many investors will lock up cash in a term deposit for a similar period.
However, it said there is limited academic data on the period needed to sell a property and would also be seeking feedback on whether 180 days was a more appropriate notice period. It may also look into periods divisible by the seven-day week, such as 91 days or 182 days.
The FCA said one of the main effects on existing investors in UK property funds is that the product would potentially no longer qualify for Isa inclusion. The FCA said it would take this into account for its final decision and would also consult with the Treasury and HMRC.
The FCA also noted that intermediaries providing ongoing advice would have to consider the ongoing suitability of products they have already advised clients to invest in. The FCA said its proposals should make property funds higher quality investments but that there may be some clients where the long notice periods don’t meet their requirements.
The FCA consultation comes as analysis from The Times reveals investors have paid £33m in fund fees during the latest bout of suspensions, starting from the M&G Property Portfolio suspension in December 2019.
