Funds investing in illiquid assets such as property and infrastructure will have to to close much faster if another Brexit-like event happens.
In a consultation paper on open-ended funds investing in illiquid assets, the Financial Conduct Authority (FCA) has said fund managers and independent valuers should move much quicker to suspend dealing.
Funds currently close when the manager judges the market to be pricing material discounts.
The regulator has proposing that funds now suspend dealing when there is ‘material uncertainty’, as expressed by an independent valuer, about the valuation of at least 20% of the fund’s assets.
Christopher Woolard, executive director of strategy & competition at the FCA, said: ‘As well as better protecting consumers, these changes should help to protect and enhance the integrity of the UK financial system.
‘They will increase investors’ understanding of, and confidence in, how funds holding illiquid assets are managed.
‘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.’
The consultation comes after billions of pounds of client assets were locked in property funds in the wake of the EU referendum result in June 2016.
Property fund giants including Henderson, Prudential and Standard Life were forced to gate their property funds due to the high volume of redemption requests, triggered over fears of the ensuing market instability following the Brexit vote.
AJ Bell head of active portfolios Ryan Hughes said the change would lessen the incentive for investors to seek a first-mover advantage.
Widespread redemptions in anticipation of a run on property is believed to have been a severe exacerbating factor in the 2016 sell-off.
'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 inherently illiquid assets produce contingency plans in case of a liquidity risk crystallising, as well as enhancements to depositaries’ oversight of the liquidity management process.
It has also requested more information to be disclosed about the liquidity risks in these funds, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors.
The proposals will remain open for consultation until the end of January 2019.