Redemption periods and liquidity mismatch in authorised open-ended property funds: regulatory update and litigation risks

The FCA has recently published a feedback statement to its consultation into liquidity mismatch in authorised open-ended property funds (CP20/15) (considered in our previous banking litigation blog post).

The FCA consultation considered whether property funds should be required to have notice periods before an investment can be redeemed, suggesting a notice period of between 90 and 180 days for these funds. The recent statement sets out the feedback received by the FCA, with many respondents defending the utility of open-ended property funds as a component of an investment portfolio. The statement confirms that only a small number of respondents agreed with the proposal of notice periods as consulted on, but just over half of respondents supported the proposals in principle (subject to conditions). The FCA will not take a final decision on its policy position until Q3 2021 at the earliest, primarily due to uncertainty over the operational hurdles to overcome to support notice periods.

The latest regulatory development follows the suspension of numerous open-ended property funds last year, when lockdown measures were announced in response to the COVID-19 pandemic. Some funds have since re-opened, but a number remain gated. It is a reminder that, in times of stressed market conditions, there is likely to be an increase in investors seeking to cash in or transfer assets held in such funds, which may lead to a liquidity crisis.

This has once again cast a spotlight on the risks arising from mismatches between the redemption periods offered by investment funds and the liquidity of the underlying assets, which we considered in our article published in the Journal of International Banking & Financial Law: Redemption periods and liquidity mismatch in the investment funds market: the litigation risks.