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Markets and Securities Services |
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short-termism (which is not appropriate for such
investments) or to deal too early, and it could also
precipitate a run on the fund.
Diversity of investors
The FCA is also considering whether there
should be a requirement on fund managers to
ensure their investor base is sufficiently diverse,
for example as set out in the current Property
Authorised Investment Fund (PAIF) regime. This
regime requires managers to prevent certain
investors from holding more than 10% of the fund.
However, this would require significant information
gathering and policing of investors by fund
managers, which could cause practical difficulties
as many holdings are via intermediaries, for
example platforms. Given the high level of
regulation of authorised funds, and the very rare
occasions on which it has been necessary to take
decisions to suspend such funds, it is difficult to
see a strong justification for such limits.
In terms of identifying underlying investors,
it’s worth noting that while current rules give
managers the power to gather information
on underlying unit holders from intermediate
These tools have certain advantages and
disadvantages, depending on the circumstances.
The FCA emphasises that there is significant
discretion available as to which tools a manager
chooses to use. This flexibility is useful since it
allows fund managers to address liquidity risk
management in a proportionate way. However,
flexibility also raises concerns for the regulator:
there is a risk that fund managers could take
inconsistent approaches which could mean
investors are not adequately protected. In light
of this, the FCA has proposed developing its
rules and guidance in this area. At this stage, the
FCA is not proposing to ban open-ended funds
holding illiquid assets or to prevent retail clients
from buying units in open-ended property funds,
and this has been welcomed by the industry.
Investor-related proposals
Mixing retail and professional investors
While the majority of authorised open-ended
property funds are NURS and therefore open
to retail investors, in reality the DP reports that
professional investors hold large holdings in such
funds. The FCA is concerned from a liquidity
management context as to how appropriate this
mix of investors is, in particular whether retail
investors may be disadvantaged by a lack of
expertise and lack of access to the equivalent
level of information as professional investors.
The FCA asks in the DP whether it may be
beneficial to separate out investor types, for
example by requiring (rather than allowing)
different classes for different types of investor.
It would then be easier for managers to apply
different dealing criteria to retail clients (who
should continue to have access to frequent
dealing points as their smaller holdings ought not
unduly affect a fund’s liquidity) and professional
clients (whose larger holdings may have a
greater impact on the fund’s liquidity and their
redemptions may benefit from being managed
over a longer period). This proposal would have a
potentially significant impact on fund managers.
While many funds already have different fund
classes for retail and professional investors, to
make this obligatory would involve considerable
work for fund managers and administrators.
Furthermore, while the proposal appears to
protect retail investors, it arguably goes too far
and gives retail investors a first-mover advantage.
As a result, it is conceivable that such funds will
become less attractive to professional clients.
It could also have unintended consequences,
such as encouraging retail clients to engage in
The FCA is
considering
whether to
strengthen the
rules on portfolio
structure,
including a
possible cap on
the proportion
of assets held
as illiquid assets
or a minimum
amount of the
fund required to
be held in cash.