Property Funds on Notice

Deferred gratification is always said to be the best. So, it is good of FCA to propose it. Except that that should say ‘impose it’, particularly if you hold units in authorised property funds. The Woodford legacy just keeps on giving.


On the astonishment scale, Consultation Paper 20/15 gets a low score. No crystal balls needed to have predicted the thrust and even quite a bit of the detail of this one. But there are one or two oddities, nevertheless. This must be the first time that FCA has identified the need to consult while most of its subject matter is disabled through suspension. It almost feels like waiting until he is unconscious before you punch him, but perhaps not quite. It is, though, as FCA admits, concern that these proposals could cause a mass exodus and a disorderly market. Not exactly the best advertisement for a measure designed to protect those very people.


Keen observers of the art will have noted FCA’s uncharacteristic uncertainty. Usually we are treated to clear opinions and usually FCA knows its own mind, not least because it will have spent many months talking to affected groups and carefully discounting much of what they hear as just more of they-would-say-that-wouldn’t-they. But this time it is different. FCA positively implores interested parties to find a better way. That too fails to inspires confidence in the proposals, but it is an offer. And who said that regulatory consultation was just a question of going through the motions?


For those who have not read the story, it’s pretty simple. As of ‘as soon as possible in 2021’, the happy unitholders of property funds will be locked in (again), this time by the imposition of a redemption notice period. Luckily, they are well used to lock-ins, so it will be difficult for many to know whether the gratification deferral is one for which they should thank the manager or the regulator. Anyway, the gist is that investors will not get their money back when they ask for it – they will have to wait for three months, six months or somewhere in between, either fixed by the manager or fixed by the regulator. When FCA makes up its mind, that is. And the notice the investor gave to start the process is irrevocable – the whole point is that the manager must know whether he needs to raise liquidity or not.


But of course, it is not as easy as that. The funds are suspended, or might be just when your ticket is called, so, when you thought you were going to get your money, you might not (but suspension risk should by then have been reduced). And the amount? Well that depends too. It will be what it will be when the day comes that you can have it back. If all that makes you feel like starting the process now, that is just what FCA was worried about. In fact, whatever they may say about suspension lasting no longer than absolutely necessary, there is a distinct sensation that the current suspension would do well to last until all this has come into force. Either that or watch out for exciting times, probably just in time for Christmas.


You might also be puzzled that this looks a bit like a second bite at the cherry. Only last autumn FCA published its rules for funds investing in inherently illiquid assets. Surely that covered property funds. Well, yes, but the new regime, when in force, will supersede, for property funds, the FIIA regime. Although the FIIA rules come into force first (next month), almost all of them are going to apply to property funds anyway, so the new rules will merely add the notice period requirement at the appointed time in 2021. Why is the notice period not applied to other FIIAs as well? We have to assume that it is more difficult to generalise about what is appropriate for an FIIA than it is for a property fund and therefore judgement calls must be left to the manager.


In case that leaves the hornets as yet unstirred, consider the grandfathering. Certain funds (those with limited redemption, dealing no more than once a month) in existence before the rules come into force next year, won’t be caught as ‘funds predominantly investing in property’ and will therefore escape the new obligations. But any that move into that exempt territory after that date will be hit by these new rules. So the grandfathered funds have an indefinite advantage, which FCA justifies, saying that they have ‘typically’ not suffered the same history of suspension. Time will tell whether this advantage becomes a valuable investor magnet. This distortion of competition is rationalised in FCA’s Compatibility Statement, but none of the argument explains why pre-existing funds, still open to new investors, should be treated differently from new ones.



For those who believe that the obvious means of dealing with the issue is to establish a secondary market in the units, the FCA has a token paragraph. Guarded as its words may be, the FCA actually concludes that it welcomes thoughts on what would be needed to enable a secondary market to operate safely for retail investors. And why not?


Oddly though, there is no sign of de minimis redemptions being exempt from the notice period. There may be problems associated with bulk registration of unitholders, but to ignore the possibility altogether seems surprising. To allow a unitholder to redeem £1000 of units per quarter would seem pretty manageable and might deal with the hard cases.


So, will they or won’t they? There can be little doubt that these plans, or something remarkably like them, will be in force in six months’ time. Roll on the secondary market.


Posted in: Competition, FCA
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Good to see the Investment Association talking publicly (FT 27th July) about developing a new improved version of UCITS for funds domiciled in the UK. We at OWL have been promoting the concept for many months and hope to see such a regime in place as early as possible after the transition period ends. And we have made the point before that such a regime can and should run in parallel with a continuing UK UCITS regime, which has such strong global brand-recognition

Posted in: Brexit, EU, FCA, UCITS
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Opening the World

As the man who has been brave enough to accept the role of FCA Chief Executive, Nikhil Rathi will occupy the hotseat at the most interesting and testing of times. It would not be too great an exaggeration to say that the future of this country’s financial services industry lies largely in his hands. Let us hope that he is broad shouldered and thick skinned. But the key question is which way should he turn.

Some will argue that his objective should be to construct a regime as similar as possible to the status quo ante. A few might even go so far as to promote general and indefinite dynamic alignment, following wherever the EU cares to lead. Others will be less keen to keep a hold of nurse and be ready to strike out into the wider world, to engage the growth economies of Asia and elsewhere.

Importantly, while ensuring the FCA retains its non-political credentials, our new man at the helm will have to resuscitate his Treasury connections to be at the very heart of the legislative redesign. Work is urgently needed to rationalise the regulatory perimeter, the legal boundary that controls where the regulator must and must not tread. But more importantly yet, global market access needs radical rethinking – an area where the UK can and should lead the world.

As government documents go, one of the least conspicuous in the class of 2020 is HM Treasury’s consultation on the Overseas Funds Regime. Published in March, the document is widely seen as deservedly ignored, dealing as it does with the obscure subject of which overseas funds should be allowed to promote themselves to British consumers. After all, provided sensible decisions are made, who cares? First, consumers should care, because they should expect to be permitted to see what is on offer from across the globe. Our own funds industry may be world-class but there are others who offer some excellent investment products too. Secondly, the UK funds industry should care a whole lot – after all this is direct competition for them, just at a time when they are losing broad access to EU markets.

But the point, of course, is reciprocity. HMT’s approach to equivalence is masterful, primarily based on a substantive FCA assessment of each overseas regime, but with HMT retaining control of the ultimate, country by country, fund class by fund class decision, so facilitating political negotiation where required. Such equivalence will, no doubt, be offered widely to those with effective consumer protection, including those nations of the EU where supervision and enforcement are properly exerted. All this takes the existing equivalence concept and both deploys it widely around the world and reflects it back onto its now-sceptical inventors.

Important as investment funds may be – very much more so than generally appreciated – they comprise only one part of the spectrum of financial services. What is needed, most urgently now, is a coherent approach to access for all financial services, not just for funds, not just between the UK and the EU, but covering every sector right around the world.

If equivalence can be deployed beyond Europe, so surely can financial services passports. Just as HMT proposes for funds, this should be evaluated and provided on a sector by sector basis, enabling banking passporting to be determined separately from insurance passporting and separately again from investment management passporting. If this has worked adequately across the EU for a couple of decades, why not with other countries with equivalent regulatory regimes? And with reciprocity too. Why would this work? Precisely because, where hitherto we have been obliged to accept passported access to the UK by all EU jurisdictions, whether or not we have confidence in the effectiveness of their consumer protection efforts, passporting based on true equivalence of outcome will be determined by the extent of the protection the home jurisdiction provides, according to our own evaluation, to UK consumers.

Not only should such an approach result in valuable and extensive market access for UK financial services across the globe, but it should also provide a powerful incentive to other nations to adopt sound and effectively supervised regulation and consumer protection. In marked contrast to the EU’s protectionist approach, UK leadership of financial services worldwide could be founded on structuring and offering equivalence assessments and passporting. Admitting to fathering regulation a few decades ago, we can advocate proportionate standards around a world in which we promote free trade to all ready to heed the call.


Howard Flight and Oliver Lodge

July 2020

Lord Flight is a former Conservative Member of Parliament 1997-2005 and Shadow Treasury Minister 1999-2004.

Oliver Lodge is Director of OWL Regulatory Consulting, the adviser to the investment industry on matters of regulation. OWL Regulatory Consulting


Originally published by Thomson Reuters © Thomson Reuters

Posted in: Brexit, EU, FCA, UCITS
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