Small investors in property funds will have their holdings temporarily frozen in the event of a shock to the market, the Financial Conduct Authority (FCA) has revealed.
The proposals come after the Brexit referendum led to panic and confusion in the property market, with some fund management companies closing funds to redemptions and others applying sharp price reductions.
The rules aim to strike a fairer balance between investors wanting to redeem their holdings and those wanting to stick out a sharp downturn in the commercial property market.
The ruling will affect small investors who have bought into property funds. The total value of these funds has grown to £35 billion, according to The Times, as investors are attracted by the perceived safety of property and yields of up to 3%.
The FCA said open-ended property funds whose independent valuers say there is “material uncertainty” over 20% or more of their assets should automatically suspend trading in the fund.
Some experts believe open-ended funds are unsuitable vehicles for investing in liquid assets because they can be forced into fire sales of assets in the event of a market panic.
But the FCA said trading suspensions worked as intended and there was no need for more serious reforms, such as mandatory liquidity buffers.
“Open-ended funds that invest in illiquid assets can encounter difficulties if significant numbers of investors simultaneously try to withdraw their money at short notice,” the regulator stated.
Investors in property funds run by Aviva, Henderson, M&G and Standard Life were prevented from redeeming their investments in the summer of 2016 as the Brexit vote triggered fears of a recession and valuers were uncertain about the value of property.
Other fund managers allowed trading to continue but imposed a huge pricing adjustment. Aberdeen Asset Management kept its fund open but cut its unit price by 17%.
The FCA has also proposed other remedies, including better disclosure by funds and clearer warnings to investors about the liquidity risks.