UK regulator wades in to property fund suspensions

Added 8th July 2016

The Financial Conduct Authority (FCA) has reminded fund managers of their obligations to investors following the closure of a number of high profile property funds in the UK.

UK regulator wades in to property fund suspensions

The regulator has issued guidance and outlined its expectations in relation to the suspension of the funds.

Built in with purpose

At a press conference on 5 July, newly instated FCA chief executive Andrew Bailey said that the ability to suspend a fund is built into their structure. The purpose being to create a pause to allow an orderly process of revaluation to happen without differential treatment of investors.

The decisions to suspend, the FCA said, have been taken by the fund managers in accordance with their internal governance arrangements and in close cooperation with their depositories.

The financial watchdog added that it has been in close contact with these funds for some time and will continue to liaise with the funds as they keep the situation under review.

Suspended trading and exit penalties

Following the Brexit result, some asset managers experienced higher than normal levels of redemption requests from investors in their funds.

Five of the largest property authorised investment funds (Paifs) in the UK, among others, suspended trading during the first week in July.

A number of funds also imposed exit penalties, with one asset manager saying that the levy was imposed “solely to reflect the need to dispose of properties quickly in order to provide liquidity”, although it was “mindful” the 17% drop in share value could deter investors from pulling their money.

The regulator emphasised that fund managers have a duty to act in the best interests of all investors and must consider how to ensure the on-going fair treatment of all of their investors.

As a result, the FCA advised that it expects all fund managers to fully understand their duties and responsibilities, as well as the tools they have for the funds they manage, as set out in the prospectus and the instrument constituting the fund.

Further, they are expected to have a clear understanding of how and when such tools might be used.

Guidance

It is the duty of the fund manager to ensure that assets are valued fairly and accurately and to ensure that any subscriptions or redemptions of units take place at a fair price, the FCA said. Failure to do so may lead to some investors gaining at the expense of others in the same fund.

If a fund has to dispose of underlying assets in order to meet an unusually high volume of redemption requests, the manager must ensure these disposals are carried out in a way that does not disadvantage investors who remain in the fund or are newly investing in it. 

In exceptional circumstances, fund managers should consider whether it would be in investors’ best interests to suspend dealing in a fund or range of funds. 

The regulator requested that managers of authorised funds contact them in advance of any proposed suspension.

Lifting the suspension

Where fund managers have chosen to temporarily suspend dealings in funds, they will need to consider when to resume dealings in the interest of investors.

Funds holding a large proportion of assets that may be, in certain circumstances, illiquid or hard to value (such as commercial property) may consider that the suspension should be lifted and investors given the opportunity to redeem at a revised valuation of the units in the fund.

This redemption price might reflect the price at which illiquid assets can be realised in a shorter than usual timeframe. In these circumstances, the FCA recommends  that fund managers should ensure that:

  • the revised redemption price and the opportunity to cancel are clearly communicated to investors who have submitted a request to redeem their investment before or during the fund’s suspension;
  • this communication explains the options that are available to investors and includes details of how to cancel the redemption requests; and
  • investors are given sufficient time to make their decision and to seek appropriate advice. This timeframe should take into account the types of investor in the fund and whether communications to these investors need to take place through an intermediary.

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Treating buyers and sellers fairly

If Aberdeen impose a 17% dilution levy on sales then surely either the quoted price is wrong or buyers should be permitted to buy at the same price. To do what they are proposing is effectively trying to deter sellers and seriously disadvantaging those that have to sell compared to the remaining unit holders. Surely gating the fund has to be fairer all around. In the meantime probably every property fund is being mis priced. What a mess!!

Posted by: Alan Beaney, 08 Jul 2016

About Author

Kirsten Hastings

Senior Reporter

Kirsten is a senior reporter for International Adviser, covering global news stories about the financial services industry. She joined Last Word Media in October 2015 after two years working as a reporter covering the staffing and recruitment industry. Kirsten has a Masters in Financial Journalism from the University of Stirling. 

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