Today's business and finance press reports that Standard Life, Aviva and M & G are closing the gates on investors attempting to withdraw from their property funds following a sharp rise in redemption requests since the Brexit vote. Investors wishing to move their money into other asset classes may wish they had moved quicker, but is there anything they can do to prevent funds blocking access to their money and is anyone accountable if the fund's ability to keep it tied up came as an unwelcome surprise?
This is not a new phenomenon. Similar moves occurred in the wake of the global financial crisis - the Wall St Journal refers to "echoes of Lehman" and it is usual for provisions allowing funds to take action to protect the value of the fund and avoid a messy and expensive fire sale to form part of the contractual documentation investors sign up to when making an investment into the fund.
Since 2008 such gates have become much more popular and are viewed as a "credit enhancement" for investors as they protect the value of the fund overall in times of market stress. Which is fine as long as investors don't need urgent access to the funds invested, or have an investment strategy that involves redeeming according to a set timescale.
Rubenstein v HSBC Bank Plc [2012] EWCA 1184
One unfortunate investor who suffered following the 2008 financial crisis was Mr Rubenstein, who sold his £1.25m home and based on advice by HSBC that an AIG Bond in its Enhanced Variable Rate Fund was "the same as cash deposited in one of our accounts" invested the proceeds in that whilst he and his wife looked for a new property.
However, when Mr Rubenstein sought the return of the funds he discovered that the fund had suspended withdrawals (as it was entitled to do) and by the time he was allowed some time later to withdraw this investment he had suffered a significant capital loss. Mr Rubenstein was understandably aggrieved as this situation was very far from that of a "cash deposit".
The Court of Appeal found that HSBC had been negligent in its description of the fund to Mr Rubenstein and was ordered to compensate him for his loss. Interestingly the Judge at first instance had found that HSBC should not be liable for Mr Rubenstein's loss as the extent of it was unforeseeable, resulting as it did from unprecedented market turmoil. The Court of Appeal disagreed and considered the important point was that Mr Rubenstein had made it clear that he wanted no risk to capital.
It is to be expected that financial advisors and those promoting investment funds have learned the lesson of Rubenstein and will have placed more emphasis on the risks posed by "gates" and been alert for investors who had time sensitive requirements for access to their capital. However, issues will always arise in unusual or unprecedented circumstances about the interpretation of contractual provisions setting out triggers for the ability to impose a "gate", how long it lasts, how any parameters by which the gate is set or removed are to be assessed and the exact timing of the cut off in comparison with the notifications provided i.e. where does the guillotine fall within the flood of redemption requests, who will be the last man out?
There may also be a contractual discretion to be applied by the fund manager or administrator in deciding when to close the gate and on what terms - if such a discretion exists then the courts have considered on many occasions the meaning of the various subtly different forms of wording that regulate the operation of such discretions. Parties have argued on numerous occasions about whether the decision maker has acted in good faith, or in a commercially reasonable manner as the case may be based on the interpretation of the particular wording in question. Cases from 2008 financial crisis will help to inform parties of the way the court views the obligations decision makers in this situation, but the contractual wordings are constantly evolving and it will be interesting to see whether sufficient certainty has been achieved to avoid disputes in the wake of this recent spate of "gate" closures.
There may even be clauses referring specifically to the impact of Brexit - it will be interesting to see whether the unprecedented next steps take a form anticipated under such clauses, or whether the pristine path now to be trodden in the wake of the referendum will throw up some unforeseeable obstacles that lead to many more questions than answers.
