Out-Law News 1 min. read

BREXIT: property fund redemption rules may need to be reviewed, says new FCA head


Redemption rules applicable to open-ended real estate investment funds may need to be reviewed, the new head of the Financial Conduct Authority (FCA) has said, after a number of these funds temporarily suspended redemptions in response to the result of the UK's referendum on EU membership.

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However, Andrew Bailey said that the run of suspensions was "sensible", and confirmed that the regulator was in "very close talks" with asset managers.

Speaking at a Bank of England press conference covering the release of its latest financial stability report, Bailey said that "illiquid" real estate funds faced particular problems at times of high demand.

"We have got open-ended funds that hold illiquid assets that don't revalue naturally," he said, in comments carried by New Model Adviser. "We will need to come back and look at that from the point of view of conduct and systemic stability."

A number of fund managers have suspended trading on their open-ended property funds for retail investors this week, due to the rising number of investors seeking to cash in their assets as a result of market uncertainty following the UK's vote to leave the EU. Managers of the affected funds include Standard Life, M&G, Aviva, Henderson and Columbia Threadneedle.”. Investors in open-ended funds can generally redeem their shares at any time.

The Bank of England said this week that it was closely monitoring UK commercial real estate in order to catch potential signs of financial instability early. Open-ended funds "could be forced to sell illiquid assets to meet redemptions if conditions persist beyond funds' notice periods", according to its latest financial stability report; which could affect economic conditions more broadly if it reduced the ability of companies to use commercial real estate as collateral when applying for loans.

Standard Life, which on Monday became the first asset manager to suspend trading in a real estate fund, said that it had taken its decision to "protect the interests of all investors, and the mix and quality of the existing property portfolio".

"In much the same way as selling residential property can take time, it can take time to sell a large office building or shopping centre," the firm explained in a statement. "Unless the selling process is controlled, there's a risk that the fund manager won't achieve the best deal for the investors in the fund, including those who plan to remain invested over the medium to long term."

The trading suspension would be reviewed every 28 days, it said.

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