The high growth of assets in property investment vehicles has the FSA concerned the products are be...
The high growth of assets in property investment vehicles has the FSA concerned the products are being advised incorrectly.
The regulator has launched a project examining the nature of property funds currently being marketed, the information available, the risks in each category and the extent to which financial advisers understand and properly advise on this type of investment.
It will cover unit trusts and investments trusts, offshore closed-end companies which can be incorporated in Isas and limited partnerships.
The FSA's attention has been brought towards limited partnerships in particular and to a lesser extent property unit trusts. Of note is how fast this area of the market has expanded in recent times, with limited partnerships growing from just over £1bn of gross assets in 1996, to more than £13bn in 2001. While the FSA is not clear how much of this increased investment represents retail money, it has assumed some of the increase comes from smaller investors.
Unregulated schemes may not be marketed to retail investors and the sale of regulated schemes is subject to the conduct of business rules on 'know your customer and suitability'.
Howard Davies, FSA chairman, said: 'The FSA is, however, concerned there may be intermediaries active in the market with a poor knowledge of property investment and therefore a poor ability to advise on suitability. In addition, it has been suggested the rules are too complicated and tend to push investors into offshore vehicles that may not be so effectively regulated.'
Under current rules, property funds have to remain open both for issue and redemption of units at all times and at least 20% of the fund must be invested in property-related assets, such as property company shares, that are easily redeemable.
The regulator is considering whether these rules, which date back to 1991, remain appropriate for retail funds, or if they should be relaxed to allow for redemption at discrete intervals, rather than continuously.
Another option being considered is to develop a new type of authorised scheme that can be sold only to institutional investors.
As such a fund would not be available to retail investors, the level of product regulation could reasonably be reduced. The FSA is working with trade bodies, the Treasury and the Inland Revenue to see if such a product can be designed.
Davies added: 'While residential property investment is familiar to many householders the complexities of a packaged investment product and the associated risks may be far from transparent.'
The financing structures of indirect commercial property investments can be complex and there is ample scope for retail investors to fail to understand the risks involved, he added.
'The price references are not always robust. There can be a lack of liquidity and high transaction costs. We are seeing some anecdotal evidence of highly geared investors being funded by lenders who then refinance to gear up against increased values, with equity being reinvested as a small deposit on the next investment.'
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation