The FCA says fund groups did not have a clear plan to value property portfolios in the wake of the Brexit vote, and has praised advisers for the way they dealt with the raft of suspensions.
The regulator will contact individual firms to put in place “remediation measures” following a review of suspensions and fair value pricing in UK-domiciled open-ended property funds after the EU referendum.
The regulator reviewed 60 firms including fund managers, platforms, wealth managers and advisers, as well as unit-linked providers and depositories.
An FCA spokesman confirmed all firms were being contacted, but would not say how many of these would have to implement remediation measures.
Over £18bn assets in commercial property funds were put on hold in the weeks following the EU referendum because of fears over falling property values in the wake of the Brexit vote.
The FCA says UK-domiciled open-ended property funds have £35bn invested in UK commercial property.
While the FCA noted liquidity management tools had proved effective in the aftermath of the UK vote to leave the European Union, the regulator made criticisms of firms across the value chain.
The regulator says: “In general, authorised fund managers did not adequately plan, or have clear policies and procedures, for valuing their property portfolios under stressed market conditions.
“Some authorised fund managers did not adequately consider the implications of their distribution model in their liquidity monitoring and management of funds.
“Authorised fund managers could improve their communications to platform providers, to enable platforms to communicate more effectively in turn with advisers and end-customers.”
In contrast, the FCA says advised clients saw little impact from the commercial property funds saga.
It says: “Wealth managers and advisers were well prepared for the suspensions. Given the diversified nature of their portfolios, the suspensions had little impact on clients.
“Firms and their clients appeared to have more concerns about the application of fair value pricing adjustments than about the suspensions.”
But the regulator says this was not the case across the board, with some firms failing to consider how the suspended funds would affect their model portfolios and how outcomes could shift from the target asset allocation as a result.
The FCA adds: “Wealth managers and advisers generally appear to remain committed to including daily-dealt property funds in client portfolios, as a way of helping to achieve a diversified asset allocation.”
On platforms, the FCA noted some cancelled standing instructions for regular payments and withdrawals relating to the suspended funds, but recommended these should be suspended only temporarily.
Overall findings were:
- The use of suspensions, deferrals and other liquidity management tools were effective in preventing market uncertainty from escalating further
- The quality of liquidity monitoring and management varies between property funds
- The valuation of real estate assets poses challenges under stressed market conditions and firms need to consider how best to deal with this issue
- Firms could be clearer in their communications, including to end-customers, following significant market events
Broader questions about open-ended funds’ investments in illiquid assets, including whether the current regulatory regime may need to be revised, are being addressed in a discussion paper that closed to feedback in May.
The FCA says it will release a summary of that review in “due course”.