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 has generated – or when they experience difficulties in withdrawing money.
Property funds are similar to other "collective investment" funds in many ways. 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 – they buy actual properties including offices, shops, factories and warehouses. Other funds invest "indirectly" – meaning that instead of buying properties, they buy shares in property companies or other property funds.
Both these types of fund are usually 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.
However, property funds can differ from other "collective investment" funds 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 Financial Conduct Authority (FCA) Handbook. Generally, we are not able to look into complaints where consumers have invested directly into property themselves or have control over the underlying investments – because these activities are not regulated.
However, we can usually consider complaints about investments in regulated collective funds.
Sometimes it is not immediately clear whether we can consider a complaint. We will need to establish this before we can look into the merits of the case.
A key consideration is whether the consumer has control over the property held by the fund. If they do, it is unlikely we will be able to consider the complaint.
Where a consumer has been advised to invest directly in property within a self invested personal pension (SIPP), we might be able to look into the complaint against the adviser.
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, which we take into account when deciding 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. Or funds investing in overseas property markets may expose consumers to the risk of changes in the exchange rate as well as in 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 remains the same when measured in the local currency.
Soon after retiring, Mr A decided that he wanted to invest a lump sum to generate an income 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.
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 to provide of a steady stream of income. We concluded that it was inappropriate for the business to recommend that Mr A invest the whole £80,000 into a single bond concentrating on overseas property investment.
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 some circumstances, a "deferral period" applies when consumers try to withdraw from a fund or switch their investment into another fund.
This means that a business will not act always immediately on instructions to surrender, transfer or switch moneys out of a fund. Instead, they 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.
These measures are in place because if a 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.
The deferral period should allow a business to sell properties in a considered manner and at a reasonable price – so it does not need to carry out a "fire sale" of its 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:
We are unlikely to take the view that a consumer’s position was damaged by the fact a deferral period might have been applied at some point if:
We can only agree that it was reasonable for a business to apply a deferral period if it has a contractual right to do so. So we will look at the fund terms and conditions to see what they said about deferral periods.
We will also consider 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 fair, clear and not misleading way (in accordance with Principle 7 of the FCA’s principles for business). To decide this. we look at documents including the product literature given at the point of sale.
If the financial business was already applying a deferral period when the initial investment was made, then we would look to see if this was brought to the consumer’s attention.
To uphold a complaint, we need to be satisfied that the consumer would not have invested in the fund if the 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 did say that a deferral period might 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 complained 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.
If we find the consumer told the business at the point of sale that they might need access to the capital they were investing 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 towards 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. This meant Mr C had 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, we saw a great deal of evidence that Mr C’s plans to set up his restaurant were already well-advanced when the business gave him advice – 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 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 will only agree that it was reasonable for a business to switch to outflow pricing if it had a contractual right to do so. So we examine the fund terms and conditions to see what they said about outflow pricing.
We will also look at the evidence we have about what was said at the point of sale – to establish whether the possibility of a switch to outflow pricing was explained to the consumer in fair, clear and not misleading way.
To uphold a complaint, we need to be satisfied that the consumer would not have invested in the fund if the business had made them aware of the possibility that the pricing basis of the fund might change.
If we think 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 of the fund changing its pricing basis. Mrs D’s 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 – so we decided that the fund was suitable for her.
When we are satisfied that a particular fund was unsuitable for a consumer, there are a number of approaches to calculating compensation.
We will look at the individual circumstances of each case and decide what we think the consumer would have done if they had not invested in the fund.
If a deferral period is in place, it could be difficult to calculate an accurate surrender value of the fund. In some circumstances, we ask the financial business to waive the deferral period – or if this is not possible, to take ownership of the consumer’s investment and pay the consumer the amount that was originally invested with an appropriate rate of return.
More information about our general approach to compensation for being “deprived” of money and for investment loss is available in our online technical resource.
ombudsman news case studies
contact our technical advice desk on 020 7964 1400
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.