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FCA Seeking Property Fund Reform?

Open ended property funds across the IA Direct Property sector are currently suspended owing to material uncertainty in valuing their assets amid the fallout from the coronavirus pandemic.

However, previous waves of suspensions, notably including the one seen the wake of the 2016 Brexit referendum, were linked to mass redemptions that managers were unable to facilitate as a result of the inherently illiquid nature of the funds themselves.

Open ended property funds have been under the scrutiny of the FCA for some time. Previous changes to funds mean that from 30th of September, authorized property funds will be forced to suspend when there is material uncertainty over the valuation of 20% or more of their assets.

The FCA is now arguing that investors in authorized property funds should be subject to a notice period of 90-180 days when withdrawing their capital. The FCA explained that ‘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’. This greatly increases the market risk that investors are exposed to. In addition, ‘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’.

Feedback on the proposals is expected by 3rd of November 2020 at the latest and the FCA will publish a policy statement with final rules as soon as possible in 2021.

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