FCA to contact individual firms following property fund review

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The FCA will contact individual firms to implement remediation measures following its review of suspensions and fair value pricing in UK-domiciled open-ended property funds following the Brexit referendum.

The regulator reviewed 60 firms across the value chain, including fund managers, platforms, wealth managers and advisers, as well as unit-linked providers and depositories.

An FCA spokesman confirmed all firms were being contacted, but would not say how many of these would have to implement remediation measures.

He says the FCA cannot be specific around measures and that remediation actions would vary from firm to firm.

Over £18bn assets in commercial property funds were put on hold in the weeks following the EU referendum because of fears over falling property values in the wake of the Brexit vote.

The FCA says UK-domiciled open-ended property funds have £35bn invested in UK commercial property.

While the FCA noted liquidity management tools had proved effective in the aftermath of the UK vote to leave the European Union, the regulator made criticisms of firms across the value chain.

Fund managers were criticised in the review for failing to adequately plan for valuing property portfolios under stressed market conditions, did not properly consider the implications of their distribution model and could improve their communications with platform providers.

Some wealth managers and advisers failed to consider fund suspension implications for model portfolios.

The FCA noted wealth managers and advisers had more concerns about pricing adjustments than suspensions, but remained committed to including the funds in client portfolios for diversification purposes.

On platforms, the FCA noted some cancelled standing instructions for regular payments and withdrawals relating to the suspended funds, but recommended these should be suspended only temporarily.

Overall findings were:

  • The use of suspensions, deferrals and other liquidity management tools were effective in preventing market uncertainty from escalating further
  • The quality of liquidity monitoring and management varies between property funds
  • The valuation of real estate assets poses challenges under stressed market conditions and firms need to consider how best to deal with this issue
  • Firms could be clearer in their communications, including to end-customers, following significant market events

Funds partner with law firm CMS Cathy Pitt says the FCA’s comments around communications and stress-testing valuations give a clue to regulator’s likely recommendations.

“Although FCA gives property funds a largely positive bill of health, improvements are clearly expected.”

Broader questions about open-ended funds’ investments in illiquid assets, including whether the current regulatory regime may need to be revised, are currently being addressed in a discussion paper that closed to feedback in May.

The FCA says it will be releasing a summary of that review in “due course”.