On 3 August 2020, the FCA published Consultation Paper 20/15: Liquidity mismatch in authorised open-ended property funds (CP20/15).

In 2017 the FCA launched a discussion paper (DP17/1) on illiquid assets in open-ended funds. As a result of the feedback it received, the FCA consulted on (CP18/27), and set out new rules (PS19/24) for open-ended funds investing in inherently illiquid assets.

In PS19/24, the FCA said that it would explore the use of notice periods and reduced dealing frequency as liquidity management tools for open-ended funds that invest in illiquid assets and are offered to retail investors.

The FCA is now consulting on how to address the potential harm caused by the liquidity mismatch of UK non-UCITS retail schemes (NURS) that invest directly in property. So that these funds can operate fairly and efficiently in the interests of all investors, the FCA proposes to introduce a notice period of up to 180 days for these funds. This could eliminate the potential for some investors to gain at the expense of others, and reduce the likelihood of liquidity runs on funds leading to ‘rapid sales’ of assets which may disadvantage remaining fund investors. The FCA refers to this as the ‘first mover advantage’.

The FCA also proposes a transitional rule for the capital rules for Self-Invested Personal Pension (SIPP) providers, so that the introduction of notice periods for existing client holdings in these funds within SIPPs would not automatically lead to a potential step increase in the amount of capital that SIPP operator firms are required to hold.

The FCA has published CP20/15, while almost all relevant funds are suspended for dealing. It wants a considered debate about the merits of the approach it has set out, at a time when there is less risk of there being a disorderly market caused by many investors demanding to sell units in these funds. The FCA wants an open discussion about these potential measures.

The deadline for comments on CP20/15 is 3 November 2020. The FCA will publish a Policy Statement with final rules as soon as possible in 2021. The FCA also continues to engage with other stakeholders on considering new initiatives within the regulatory framework that would facilitate investments in long-term assets.