The Final Straw?

Another, new, noisy consultation paper, and we know from experience that most FCA consultation pieces end up coming into force (usual disclaimer here about past performance being no guarantee…)

So, here is our view of the proposed changes from both a compliance and advisory point of view.

Overview

The proposal is that open-ended property funds will require a 90 – 180 day notice period for withdrawal. The FCA is consulting on this until the 3rd November this year, with a possible policy statement and rules to be issued sometime in 2021.

At the moment there is nothing that you have to do. This is a consultation paper, so it’s all about thinking. It’s time for you to think about your current proposition, processes, and clients and if this is made into a Policy Statement (which most are) how will this impact them, and you? Now is the time to think about this and agree internally what your approach moving forward is going to be. Your obligation to your client is to ensure they are in the best priced suitable investment(s) for them to achieve their goals/objectives in line with their attitude to risk and capacity for loss, which given these potential new rules, may no longer be. However, what you shouldn’t do now is make any rash decisions.

So, what are your options going to be?  

Are you going to tell your clients to up and sell their property holdings? If so, what will your process be for this? Will you do this in bulk? Or gradually? Both have notable pros and cons so quick decisions shouldn’t be made.

If you do decide that selling is the best option, what are you going to recommend your clients invest in instead? REITS, OEICs, Investment Trusts, physical Property? Whatever it is, you need to carry out research into the other possibilities to identify what will be suitable for your clients in replacement of their existing property investment(s). One thing to note is the FCA has mentioned that under these new rules, it could mean that these funds could be excluded from ISAs, however, this is not certain yet.

Another option could be to rebalance around the property investment(s) if annual money is coming into the policy (i.e. Pension contributions / ISA top ups etc). If these have risen in value, could you adjust other investments held to accommodate the property fund to keep the client in line with their risk profile? Why would you, or would you not, consider this option?

The flip side to having the option to sell is the question around whether the new rules really are an issue? Well, it’s all dependant on the type of client, if this is an investment they are going to rely on for liquidity, when they will be relying on it? For example, if you have a client who is 30 who is using this investment for retirement, they won’t need access to it any anytime soon and therefore it’s not really a problem. However, if you have someone who is close to retirement, then you may decide it is best for them to sell. Alternatively, if your client has 5% or 10% invested in property, they could take the cash they need from the remaining 95% or 90% to cover income withdrawals if income is needed (although this creates asset allocation considerations).

Therefore, is it really a problem? The main focus should remain on ensuring the client is invested in line with their risk profile. You should reflect back on your client segments (PROD) and what it is each of them needs and how these new possible rules could impact them and act accordingly.

This is not just something to consider at an adviser and client level. There is also a conversation to be had at a higher level. Take SIPPs for example. For a SIPP if there are property funds held in this, the SIPP is required to have higher capital adequacy levels. This can have an impact on the level of cash the client should hold or the charges levied by the SIPP provider? What discussions are you going to have around this with your chosen providers?

The main thing to take away from this is, as always, you need to be documenting everything. You need to be documenting decisions made, the process you have identified you are going to take, and how you are going to advise clients? What reasons are you going to give for this?  Documentation is key!

If you decide to make some changes, then read this blog from our friends at Para-Sols who look at the practical implications of this.

 

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