The Financial Conduct Authority (FCA) has put forward proposals that could transform the UK鈥檚 open-ended property fund industry and how it responds to market downturns.

The UK鈥檚 financial regulator has been seeking to reform the sector following a series of liquidity issues in the aftermath of the global financial crisis and the Brexit vote in 2016.

Eighteen months after publishing a discussion paper, the FCA has proposed that open-ended funds should suspend trading 鈥渨hen the independent valuer expresses uncertainty about the value鈥� of illiqid assets, or 鈥渋mmovables鈥�, such as real estate.

The FCA has also proposed requirements to disclose more information to investors about the liquidity risks in funds and how investors could be affected if funds need to be 鈥榞ated鈥�.

Other proposals include requiring fund managers to establish contingency plans 鈥渋n case of a liquidity risk crystallising鈥� and the use of depositaries to oversee liquidity management.

The regulator is also considering creation a new category of vehicles called funds investing in inherently illiquid assets (FIIAs).

The proposals are aimed at protecting retail investors, which often gain access to property funds through platforms that require daily dealing.

But it could also have implications for institutional investors that have exposure to open-ended property funds 鈥� some existing funds contain a mixture of retail and institutional capital.

And John Forbes, an independent consultant, said 鈥渢he development of new types of funds for retail investors could facilitate investment鈥� by defined contribution pension schemes.

Forbes, who has produced reports on the evolution of property funds for the Association of Real Estate Funds (AREF), welcomed the announcement, saying the FCA鈥檚 鈥渂road conclusions鈥� were in line with his most recent report published last year.

The report concluded that 鈥渇und managers acted appropriately within the regulatory framework and that the parts of the regulation that did not work were fairly limited in extent鈥�, he said.

鈥淚 think that it is also good news that this is a consultation that runs until January so the industry can respond to the detail of the proposals.鈥�

However, he added, 鈥渕y main disappointment is that the opportunity to make changes to facilitate the development of new, less liquid funds has not been taken鈥�.

Last year鈥檚 report called for 鈥渕easures to permit the development of a broader range of listed and unlisted vehicles with different liquidity characteristics would give retail investors greater choice鈥�.

Melville Rodrigues, partner at law firm Charles Russell Speechlys, also welcomed the proposals, 鈥渋n introducing appropriate protections for investors鈥� particularly under stressed market conditions鈥�.

He said they should help investors better understand fund products, and 鈥渞educe the risk of some investors gaining at the expense of others due to uncertainty about the value of the fund assets, and hopefully reduce the likelihood of a run on the fund鈥�.

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