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FCA consults on rules to help prevent runs on real estate funds

The U.K. Financial Conduct Authority is consulting on new rules to reduce the risk of investor runs on open-ended funds that hold illiquid assets, such as real estate.

Although the FCA did not deem a major regulatory overhaul in this area to be necessary, it has drafted proposals to ensure market stability in the future. This was prompted by a series of investor runs on open-ended real estate funds in mid-2016 following the results of the EU referendum. Panicked by the possibility of falling property prices linked to Brexit, large numbers of retail investors rushed to take money out at the same time. But funds struggled to meet redemptions given that real estate is an illiquid asset class, and unlike stocks or bonds, assets can take months or even years to sell off.

Major names in the U.K. fund management industry including Aviva PLC, Standard Life Aberdeen PLC and M&G Investment Management Ltd. all temporarily suspended property funds, prompting debate about the suitability of open-ended fund structures (which allow investors to withdraw money at any point) for illiquid asset classes.

In response, the FCA is consulting on a raft of new measures to give greater clarity and protection to investors. These include greater disclosure to investors about liquidity risks, the liquidity tools managers have to manage liquidity risks, and what impact they would have on investors if used. Other suggested measures include a requirement that funds suspend trading of an independent valuer is uncertain about the value of any commercial property that makes up a significant part of the fund's overall assets.

"As well as better protecting consumers, these changes should help to protect and enhance the integrity of the U.K. financial system. They will increase investors' understanding of, and confidence in, how funds holding illiquid assets are managed. We expect these changes to result in fewer runs on funds holding illiquid assets, and to reduce complaints from retail investors about perceived unfair treatment when they exit such funds."

The FCA will review feedback and aims to publish a final rules and guidance in a policy statement in 2019. The consultation period runs until Jan. 31.