The power to settle financial complaints.
The power to settle financial complaints.
This section of our website describes our approach to complaints made by consumers about property funds.
These complaints often come about when consumers are disappointed by the return that a property fund generated – or when they experience difficulties in withdrawing money.
In many ways property funds are similar to other "collective investment" funds. Consumers make lump-sum investments, which are pooled together and used to purchase a range of assets.
Some property funds invest "directly" in commercial property by buying actual properties, including offices, shops, factories, and warehouses. Some funds invest "indirectly", which means that instead of buying properties, they buy shares in property companies or in other property funds.
Whatever route is taken, the funds are normally unit-linked. This means that they are divided into units, with each unit representing a share of the underlying investment pool. Consumers buy a certain number of units, and the unit price will change over time to reflect the value of the underlying assets.
The funds are sold as general investment products and as part of pension plans. So they are usually managed by pension providers, investment companies or life assurance companies.
Property funds can differ from other "collective investment" funds, mainly because:
The following sections provide more detailed information about our approach when investigating complaints about property funds:
For a complaint to come under our remit, it must be about a "regulated activity" as defined in the FSA Handbook.
Generally we can consider complaints about investments in regulated collective funds – but not complaints where consumers have invested directly into property themselves or otherwise have control over the underlying investments.
For general information about how we approach complaints about the "suitability" of investments, look at our page on assessing the suitability of investments.
Property sales can take a long time to complete, and it can be difficult to establish an accurate valuation of individual properties. As a result, consumers face certain risks when investing in property funds, and we take these into account when considering whether or not a particular fund was suitable.
For example, larger funds – and those with a broader range of investments – are likely to be less exposed to volatility from an individual property or sector. Funds investing in overseas property markets may expose consumers to the risk of changes in the exchange rate as well as the underlying property value. This could mean that the value of a consumer’s investment falls even if the value of the fund’s assets remained the same when measured in the local currency.
Soon after retiring, Mr A decided that he wanted to invest a lump sum in order to generate an income for himself to supplement his pension. The business advised him to put £80,000 into a bond that invested in a range of property funds outside the UK. Mr A lost a significant proportion of his investment and he complained that he had been sold something that was too risky.
We concluded that it was inappropriate for the business to recommend that Mr A invest all £80,000 into a single bond concentrating on overseas property investment. Although the business had recorded Mr A’s attitude to risk as "adventurous", we did not think that this was an accurate reflection of his circumstances and needs at the time. It was clear that Mr A was not in a position to replace any capital that he lost and that the bond was not a suitable product for the provision of a steady stream of income.
Some of the funds that the bond was investing in were based in developing countries. So not only was Mr A exposed to currency risk, but those property markets were more volatile than the UK equivalent. This had not been explained to Mr A when he made the investment.
In certain circumstances, consumers can face the possibility of a "deferral period" applying, when they try to withdraw from a fund or switch their investment into another fund.
Where a financial business experiences a significant increase in withdrawals from its property fund, it may need to sell properties to raise enough cash to meet those withdrawals. Property sales can sometimes take several months to complete, particularly during periods of market volatility.
Financial businesses sometimes apply deferral periods, meaning that they will not act immediately on instructions to surrender, transfer or switch moneys out of a fund. Instead, they can promise to do so as soon as possible – but they reserve the right to delay until the end of a set deferral period, which is often six months.
This measure is intended to allow financial businesses to carry out property sales in a considered manner and at a reasonable price, rather than being required to conduct a "fire sale" of their holdings which might reduce the value of the assets remaining in the fund.
The complaints we receive about deferral periods often relate to:
When considering a complaint about a deferral period, we will look at whether:
The fact that a deferral period might have been applied at some point is unlikely to persuade us that the consumer’s position was actually damaged, if a deferral period:
We examine the fund terms and conditions to see what they said about deferral periods. A financial business must have a contractual right to apply a deferral period, before we will agree that it was reasonable for it to do so.
We will also look at the evidence to see what was said at the point of sale – and whether the possibility of a deferral period being applied was explained to the consumer in a manner which was fair, clear and not misleading.
If the financial business was already applying a deferral period when the initial investment was made, then we are likely to say that this should have been brought to the consumer’s attention.
Before we uphold a complaint, we would need to be satisfied that the consumer would not have invested in the fund if the financial business had made them aware of the possibility that a deferral period could be applied.
Mrs B was advised to invest £8,000 into a property fund. Although the fund’s terms and conditions mentioned the possibility that a deferral period could be applied, the business did not tell Mrs B that one had already been in place for over a month.
Some months later, Mrs B found out that a deferral period was in place – and had been ever since she invested. She said that she would not have invested if she had known that a deferral period was in place at the time.
We said that when the business made its recommendation, it should have told Mrs B that a deferral period was being applied to investors trying to leave the fund – as this was material information that was key to her ability to make an informed decision about whether to invest.
We were satisfied that, on the balance of probabilities, Mrs B would not have invested if she had known that a deferral period had been in place at the time.
Where, at the point of sale, a consumer had told the financial business that they might need access to the capital invested, at short notice or at a specific time, we are likely to say that the investment was unsuitable.
A year after investing, Mr C asked to withdraw from a property fund as he needed the capital to put toward his new restaurant venture. The business told him that there was a deferral period in place and that he would have to wait for at least six months before he could withdraw his money. Mr C was required to use other savings to help set up his restaurant.
The business pointed out that the documents it had given Mr C when he was buying the fund made it clear that he could not rely on being able to withdraw from it at short notice. While we accepted this, we did not agree that this meant the fund was suitable for Mr C, who was not an experienced investor.
In fact, there was a great deal of evidence that Mr C’s plans to set up his restaurant were already well advanced when the advice was being given – and that Mr C had discussed this with the business. We said that the business should have realised that Mr C was likely to need access to his funds at short notice – and that it should return him to the position he would be in, if it had not given him the unsuitable advice.
Financial businesses sometimes change how they calculate the price of the units in a property fund. Most of the time, the pricing is on an "inflow" basis, to reflect the fact that the net flow of cash to the fund is positive or neutral. Funds will generally be accumulating property or retaining cash during these periods.
If there is a prolonged period when more investors are leaving a fund than are entering it, there may be a switch to "outflow" pricing. This is designed to reflect the costs of selling property, which can be significant. When a fund is priced in this way, the unit price can be reduced by as much as 5% to 10%.
The complaints we receive about switches to "outflow" pricing often relate to:
When we look at a complaint about a switch to "outflow" pricing, we will consider whether:
We examine the fund terms and conditions to see what was said about outflow pricing. A financial business must have a contractual right to switch to outflow pricing, before we will agree that it was reasonable for it to do so.
We will also look at the evidence, to see what was said at the point of sale – and whether the possibility of a switch to outflow pricing was explained to the consumer in a manner which was fair, clear and not misleading.
Before we uphold a complaint, we would need to be satisfied that the consumer would not have invested in the fund, if the financial business had made them aware of the possibility that the pricing basis of the fund might change.
Where it seems to us that a consumer’s circumstances made them particularly sensitive to volatility, we might say that the possibility of a switch to outflow pricing made the fund unsuitable for them.
Mrs D was an experienced investor with a large and diverse portfolio who invested £20,000 in a property fund. A few months later, the business wrote to her to say that the fund was switching to an "outflow" pricing basis.
After examining the evidence, we were satisfied that the business had told Mrs D at the point of sale about the risk that the fund could change its pricing basis. We also decided that the fund was suitable for Mrs D, as her circumstances did not mean that she was relying on the proceeds from selling the fund or was particularly sensitive to a sudden reduction in its value.
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This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.