U.K. Stiffens Property-Fund Rules After Woodford, H2O Shocks

(Bloomberg) -- The U.K.’s top markets regulator stiffened its rules for funds that invest in hard-to-sell property assets in the first major rule change since the crises that struck funds run by Neil Woodford and H2O Asset Management.

The Financial Conduct Authority ordered property funds, which have about 21 billion pounds ($26 billion) in assets under management, to step up their monitoring of liquidity so they can meet redemptions without having to dump investments in a rush. The watchdog is also considering applying the restrictions to a wider range of mutual funds.

Managers should suspend redemptions if there’s “material uncertainty” about the valuation of 20% or more of property in the funds, the FCA said in a statement on Monday. Still, the regulator said authorized fund managers together with depositaries have the ultimate say in deciding when to freeze withdrawals.

“We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds, but it is important that they are appropriately protected,” Christopher Woolard, executive director of strategy and competition at the FCA, said in the statement. “We also want to make it clear that authorized fund managers are responsible for managing the liquidity risk in their funds and acting in the best interests of investors.”

Woodford Freeze

The restrictions come as the Bank of England and FCA are stepping up warnings about mutual funds that allow daily withdrawals while investing in assets that can be hard to sell on short notice. Bank of England Governor Mark Carney has said such funds are “built on a lie.”

The FCA said it is weighing whether daily redemption policies make sense for mutual funds investing in illiquid assets or whether less frequent trading would improve protection particularly for retail investors. Also under consideration are stress tests of funds’ liquidity with the possibility that the regulator would intervene when a fund fails specific limits.

The push for tougher regulation gained urgency after Woodford shocked the financial world by suspending withdrawals at his flagship fund in June. Not long after that, Natixis SA-backed H2O suffered nearly 8 billion euros ($8.7 billion) of outflows amid concern over its holdings of bonds related to German financier Lars Windhorst.

The FCA began considering restrictions on property funds after several of the biggest fund managers suffered major withdrawals in the aftermath of the 2016 Brexit referendum and were forced to suspend redemptions. Since then, big fund managers including Legal & General Group Plc, M&G Investments and Standard Life Aberdeen Plc have increased the amount of cash they hold to ensure they can meet a spate of withdrawals.

As the U.K. approaches Brexit with or without a deal on Oct. 31, investors have once again soured on property funds and have pulled money from the sector for 11 consecutive months through August, according to data from Calastone Ltd.

Chris Cummings, chief executive officer of the Investment Association, an industry group, called the FCA’s new restrictions “pragmatic and measured.” The rules should help investors choose funds in the future, he said in an emailed statement.

--With assistance from Suzy Waite.

To contact the reporters on this story: Silla Brush in London at sbrush@bloomberg.net;Lucca de Paoli in London at gdepaoli1@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, ;Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry, Ross Larsen

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