The Financial Conduct Authority has proposed tougher rules for open-ended property funds in the wake of the run on property investments following the Brexit vote.
Under the City regulator's plans, fund groups would be required to suspend dealing in their property funds as soon as there is 'material uncertainty', as expressed by an independent valuer, over 20% of fund assets.
The watchdog argued this would 'reduce the risk that some investors may lose out because the units in a fund are wrongly priced'.
The FCA's planned rules are a response to the fallout from the Brexit vote for property funds two years ago. As investors rushed to pull their money, funds struggled to cope with redemption requests given the illiquid nature of their holdings.
Fund groups tackled the issue in different ways: six funds suspended trading, while others continued to trade but imposed penalties of 10% to 15% to discourage investors from withdrawing their money.
Under the FCA's plans, responses to these periods of market stress are likely to become more uniform, with suspensions, rather than exit levies, becoming the norm.
‘We expect these changes to result in fewer runs on funds holding illiquid assets, and to reduce complaints from retail investors about perceived unfair treatment when they exit such funds,' said Christopher Woolard, FCA executive director of strategy and competition.
Ryan Hughes, head of active portfolios at AJ Bell, said under the new rules property funds were 'likely to suspend trading sooner and potentially more frequently than they have in the past'.
'It will also make the "fair value adjustment" or "market value adjustments" we saw from property funds after the referendum vote become a thing of the past – as the funds would just suspend trading in these circumstances,' he added.
The FCA has also proposed that managers of funds investing mostly in illiquid assets produce contingency plans for a liquidity crisis.
Fund groups will also be required to do more in their labelling of funds to draw attention to those which invest in illiquid assets.
‘This should make it less likely that consumers invest in funds that are not suitable for their needs,' the FCA said.