Consumer watchdogs are stepping in to stop property funds from refusing to give investors their money back during a financial crisis.
Despite having built large cash buffers, a series of giant commercial property funds were suspended after a stock market upset triggered by the Brexit referendum in June 2016.
Fund managers did not have enough money to meet the demands of investors fleeing the market, so suspended trading to protect their assets.
But they could not sell properties fast enough to release the cash they needed to pay investors.
Six funds with a net worth of around £14 billion stopped trading, while others hit investors with massive early exit fees of up to 15% of their withdrawals.
The suspended funds include big names like Aberdeen, Aviva and M&G.
Different outcomes for investors
Although most of the funds are now trading, the financial shock tied up investor cash for several weeks.
Regulator the Financial Conduct Authority is concerned that investors are unfairly treated when they try to trade shares in funds with illiquid assets that offer daily dealing.
The FCA issued a discussion paper inviting views on the topic.
The watchdog is concerned that individuals and institutional investors hold the same classes of shares in the funds but seek different outcomes.
“The balance of interests between investors who want to withdraw their money and those who want to remain is a key issue,” says the discussion paper.
Calculating quick exit share values
“Open-ended funds that invest in illiquid assets can encounter difficulties if investors expect to be able to withdraw their money at short notice. For example, it can be difficult for a manager to calculate the price of a fund every day if that fund invests in illiquid assets whose prices are calculated less frequently than every day.
“These difficulties can be exacerbated if an event in the market triggers an upsurge in redemption demand, or conditions change in the market for the underlying assets.”
The FCA is inviting comments about how to deal with investors seeking a quick exit from ill-liquid funds and how fund rules could change to ease the problem.
Download the discussion paper Illiquid assets and open-ended investment funds
The consultation closes on May 8, 2017.