The Financial Conduct Authority (FCA) is looking to introduce rules to improve the structure of open-ended property funds.
It has rolled out a consultation which proposes requiring investors to give up to 180 days’ notice before they redeem their investments.
Currently, property fund investors can buy and sell units very frequently, sometimes even daily.
But the regulator warned that the properties in which these funds are invested cannot be sold or bought at the same pace.
This results in a “liquidity mismatch”; and when too many people are redeeming their investments at the same time, fund managers need to halt dealings due to liquidity imbalances.
Property fund suspensions have been an increasing trend in the last few years, with one of the biggest examples being the M&G Property Portfolio, which stooped dealings in December 2019
Protecting investors from harm
Suspension measures are there to protect investors in exceptional circumstances, the FCA said. But the regulator has seen a high number of property funds halting dealings recently, “which suggests that there may be wider problems”.
The watchdog added that the situation is concerning as the current structure “could disadvantage some investors because it incentivises investors to be the first to exit at times of stress”.
When this happens, those who remain invested in the fund are at risk of harm.
Christopher Woolard, interim chief executive at the FCA, said: “We think that our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.
“We want open-ended funds to provide a structure through which investors can safely invest in less liquid assets, which offer attractive expected returns and at the same time supports investment that benefits the wider economy.
“We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress, and allowing them to operate in a way that all investors are treated equally.”
The consultation will be open until 3 November 2020, and a policy statement will be published “as soon as possible in 2021”, the regulator said.