Out-Law / Your Daily Need-To-Know

Property fund suspension 'in investors' best interests'

Out-Law News | 19 Mar 2020 | 5:22 pm | 1 min. read

Mass suspensions in dealing by property funds in response to market volatility should not be seen as a cause for alarm, an investment funds expert has said.

The Financial Conduct Authority (FCA) issued a short statement yesterday in response to a number of recent suspensions, confirming that this was "likely to be in the best interests of fund investors" and that other suspensions were likely to follow.

"Suspensions can be used by managers of open-ended funds, in line with their obligations under applicable regulations," the FCA said.

Bell Alice_November 2019

Alice Bell

Senior Associate

The FCA's primary concern here is protecting investors and, in these uncertain times, a suspension can be in investors' best interests.

Regulations will be strengthened later this year requiring certain open-ended funds which invest primarily in property and other 'illiquid' assets to suspend most dealing where there is "material uncertainty" about the value of more than 20% of the fund's assets.

The FCA is creating a new category of 'fund investing in inherently illiquid assets' (FIIA), which will also be subject to new disclosure, risk warning and oversight requirements from 30 September 2020. Fund managers and depositaries have been encouraged to introduce these requirements ahead of the deadline where this is in customers' interests.

Investment funds expert Alice Bell of Pinsent Masons, the law firm behind Out-Law, said: "The FCA's statement is in line with its policy reasons for introducing mandatory suspension requirements for FIIAs and should not be seen as a negative for property funds".

"The FCA's primary concern here is protecting investors and, in these uncertain times, a suspension can be in investors' best interests. The FCA may be looking to allay investor fears as to why funds are suspending dealing by confirming that fund managers and Standing Independent Valuers have taken appropriate action," she said.

Funds which hold assets which cannot easily be converted into cash, such as property, can encounter liquidity difficulties if significant numbers of investors try to withdraw their money simultaneously at short notice. Funds classified as UCITS are regulated at EU level, but the FCA is tightening the requirements on certain non-UCITS retail schemes (NURS) in order to reduce the potential for some investors to gain at the expense of others, and of funds facing the need to carry out 'fire sales' of assets at undervalue in order to meet redemption requests.

In its statement, the FCA said that funds' independent valuers were currently unable to provide accurate valuations of commercial real estate (CRE), given market volatility caused by the coronavirus pandemic and the economic response to the pandemic by governments.

"In such situations, a fair and reasonable valuation of CRE funds cannot be established. As a result, some managers of open-ended CRE funds have temporarily suspended dealing in units of these funds and others are likely to follow for the same reason," it said.