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9 July 2020

The Financial Conduct Authority (FCA) plans to consult on the future of open-ended property funds later this summer, its interim chief executive has said.

Speaking during an Investment Management webinar Christopher Woolard said the investment management industry had shown great resilience during the coronavirus pandemic and singled out its willingness to work with the regulator when it became necessary to suspend daily dealings in open-ended property funds. He commended fund managers for working with the FCA to ensure this happened “quickly and safely”.

Woolard indicated the regulator was keen to consult on the issue later this summer adding the consultation would investigate whether long-term investor interests would be “better served by finding a way in which these funds could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets”. Recession in the UK property market ‘likely well underway’

He said: “Overall, the fund management industry showed considerable resilience in the face of volatile market conditions. When material uncertainty over commercial real estate values made it necessary to suspend daily dealing in open-ended property funds, fund managers worked with us to make this happen quickly and safely. “While suspension is in the best interest of investors, this crisis, like the aftermath of the Brexit referendum, shows the difficulty for these funds of maintaining a promise of daily liquidity to investors when their assets are inherently illiquid.”

Woolard added: “There has been considerable discussion about how to ensure redemption arrangements offer a fair deal to those remaining in the fund as well as those who wish to exit.”

Adrian Lowcock, head of personal investing at Willis Owen said the move to consult was “vital” in rebuilding trust in the retail funds industry.

“The issue of putting illiquid investments into liquid daily dealing has been a growing problem. “The events in the last twelve months have made it all too clear that something needs to be done, and it is a real step forward that the FCA is talking so openly about ensuring these open-ended property funds are converted into better structures. For investors, this change will provide a much more suitable investment for them, and change can’t come soon enough.”

Challenges on the horizon

More broadly, Woolard said throughout the crisis the FCA had tried to “build a bridge across the economic aspects of the Covid-19 crisis” to ensure both consumers and firms can come emerge in the “best shape possible”. FCA moves to delay consultation responses amid coronavirus outbreak. He said lockdown and its economic consequences had given the regulator the chance to review its rule book to focus less on tick-box compliance and more on promotion “outcomes that serve the public interest”. Woolard said while government interventions focused on credit were entirely necessary “turning off the tap – and where necessary mopping up – will be the greater challenge”. “These interventions have given companies and consumers a fighting chance of weathering an unprecedented economic, social and health storm. But more debt does not, and cannot, provide a sustainable foundation for rebuilding.

“For corporates, robust health requires equity. The scale of that need was highlighted in the recent The City UK report on recapitalisation, which estimated £100bn of investment would be necessary. We can debate whether that is the right number or not, but we know it will be big. “Helping address this need is the market’s fundamental purpose,” the interim CEO explained.

He added: “Listed UK companies have made good use of their access to the UK’s public capital markets over the past few months. Investors – your members primarily among them – have proved willing to supply.” For example, UK companies listed on the LSE’s main market and AIM raised £14.7bn in equity between April and June this year. That’s almost double (194%) the amount in the same period last year, said Woolard.

“To continue to support the vital work of recapitalisation, we want to understand whether there are some types of issuers that are unlikely to be served by public or private markets over the period of crisis into recovery. And, if there are, whether we have a framework that accommodates a wide range of issuers and those investors able to understand and bear the inherent risks involved. “Our objective in this discussion is simple. And it is a constant. We want rules that balance and meet the needs of both issuers and investors. This is vital. High standards, properly monitored, and if necessary enforced, give investors the confidence to invest.

“At the heart of these requirements are fundamental protections for investors. Without them markets would not work. But that does not mean that we cannot ask how the rules should be calibrated. There is a question about whether some elements of the framework inhibit rather than promote opportunities for issuers and investors.”


By David Petty

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