The FCA knows that the UK must ensure that its funds regime isn't hobbled by worries as it moves outside of the European Union's orbit. The pandemic led a cluster of firms to temporarily shut the door to client redemptions.
The Financial Conduct Authority may restrict open-ended funds in future. The move has been prompted by several firms halting redemptions in recent months.
The UK regulator’s interim CEO, Christopher Woolard, told a seminar in London this week that the FCA is to consult the sector later in the summer about how such funds “could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets”. He did not explicitly state how such funds might be affected.
In March this year asset managers Janus Henderson and Kames Capital suspended dealings in their UK property funds, citing coronavirus-induced turmoil as a reason. This added to a difficult period for a sector buffeted by Brexit and political uncertainties last year. Janus Henderson temporarily halted dealings in its Janus Henderson UK Property PAIF and Janus Henderson UK Property PAIF Feeder Fund with effect from 16 March. Kames shut its Kames Property Income Fund and Kames Property Income Feeder funds to dealings. Last year, the open-ended funds sector was also slammed when fallen star manager Neil Woodford halted withdrawals; M&G suspended its £2.5 billion property portfolio fund in December 2019.
In the background is the need for the UK's fund regime to keep up to date as the UK gears up for life outside the European Union. Part of any trade deal with Brussels will need to address how funds can be bought and sold between the UK and 27 EU member states, a situation which has been handled within the Single Market and its "passporting" regime.
Woolard, who is holding the CEO slot before London Stock Exchange chief executive Nikhil Rathi takes up the post in the autumn, said in overall terms, that the UK 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,” he said.
"The FCA's move to consult on the future of open-ended property funds is a vital step forward which will help to rebuild trust in the retail funds industry. The issue of putting illiquid investments into liquid daily dealing has been a growing problem,” Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK, said.
"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,” Lowcock added.
Fund redemptions and “gating” of investor pull-outs have caused soul-searching around whether regulations are effective, or even whether rules can instil a false sense of security and encourage clients to become complacent.
According to FT Advisor (8 July), the 11 UK property funds available to retail investors, with £12.8 billion of assets between them, were suspended in the third week of March.
The FCA has been watching the development for some time. Earlier this year it fired out a “Dear CEO” letter to the asset management sector, warning about what it saw as governance failings. The FCA’s letter said that open-ended funds can have a liquidity mismatch between the terms at which investors can redeem and timescales needed to liquidate assets; on 30 September 2019 the regulator issued a policy statement on what happens with such funds when assets are illiquid.
Elsewhere in his speech, the FCA’s Woolard said that the regulator is looking at measures to make it easier for firms to raise capital on the equity market – a concern borne out of how the UK might recover from the pandemic.
“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. But, at the smaller end of the corporate spectrum, there are companies who do not have the scale to meet these requirements,” he said. “It is unlikely their equity or debt issues would be large enough to support daily trading, and unclear [whether] they or their investors would need it. We would welcome a discussion on whether and how such companies could best access capital markets – for example, with periodic disclosures, perhaps with more periodic trading,” he said.
“For larger corporates, who already meet the UK’s super-equivalent premium listing standard, is there a case to simplify the process for follow-on equity issuance while maintaining valuable pre-emption rights and essential disclosures? Equally, away from the equity markets, for premium listed issuers, should we also allow debt issues in lower denominations and therefore make the debt of these corporates more accessible to retail investors?” he continued.
“The FCA cannot create markets. We cannot provide liquidity. But we can work - with others - to ensure we have a framework that accommodates markets in which others wish to participate,” Woolard continued.