UNITED KINGDOM: FCA – Liquidity Mismatch in Authorised Open-Ended Property Funds

Friday May 7 2021

In August 2020, the FCA published consultation paper CP20/15: Liquidity mismatch in authorised open-ended property funds. In the consultation, the FCA discussed reducing the potential for investor harm that arises because the terms for frequent (typically daily) dealing in units of some property funds are not aligned with the time it takes to buy or sell the buildings in which the funds invest. This creates a liquidity mismatch between the redemption terms that the fund offers to investors and the fund’s assets.

Property funds often hold a significant cash balance, or other liquid assets, to reduce the risk posed by the liquidity mismatch. Otherwise, they might not have time to sell properties to pay investors who can request their money back at short notice. If a fund runs short of cash, this can cause it to suspend dealings. Investors may request their cash back in anticipation of such suspensions, potentially increasing the problem further.

To address this, the FCA consulted on whether property funds should be required to have notice periods before an investment can be redeemed. They suggested a notice period of between 90 and 180 days for these funds.

Following the consultation, the FCA has now published FS21/8 and a statement on next steps. In the light of its consultation on long-term assets, FCA notes that it will not take a final decision on its policy position on property funds until Q3 2021 at the earliest in order to take feedback to the LTAF consultation into account.

If FCA proceeds with applying mandatory notice periods for property funds, it will allow a suitable implementation period before the rules come into force, approximately 18 months to 2 years, in order to allow firms to make operational changes.

This approach would have a number of benefits including reducing the risks to fund investors and the wider economy of pressure to sell fund assets at speed, rather than maximum price, in order to meet redemption requests. It would also allow funds to be more efficient, enabling them to hold less cash to manage the liquidity mismatch, and therefore boost investors’ returns.

Stakeholders raised concerns around the operational challenges for fund managers and other firms, in particular in relation to ensuring that the infrastructure to support purchase and sale of holdings by retail investors will work seamlessly with notice periods. Some of these operational challenges also need to be addressed to make progress on new options for a Long-Term Asset Fund (LTAF).

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