The FCA is weighing up possible rule changes for investing in illiquid assets through open-ended funds.

The regulator is launching a review after the Brexit vote led to some investors to fleeing property funds.

Officials want to hear stakeholder views on the practice and the challenges that it can pose to managers and investors.

The regulator today published a Discussion Paper on illiquid assets, which may include land and buildings, infrastructure and financial assets such as unlisted securities.

The FCA acknowledged they provide investors with benefits such as the potential to earn strong investment returns in the medium to long term and diversification of portfolio risk.

The FCA report stated: “One of the key issues the Paper raises is the balance of interests between investors who want to withdraw their money and those who want to remain. Open-ended funds that invest in illiquid assets can encounter difficulties if investors expect to be able to withdraw their money at short notice. For example, it can be difficult for a manager to calculate the price of a fund every day if that fund invests in illiquid assets whose prices are calculated less frequently than every day.”

The FCA said these difficulties can be “exacerbated if an event in the market triggers an upsurge in redemption demand, or conditions change in the market for the underlying assets.” – such as after the EU referendum.

It stated: “If the market for the underlying assets is affected by sudden, severe changes in conditions, leading to price falls that are not fully reflected in fund valuations, some investors might be able to sell their holding for more than it is worth, disadvantaging the remaining investors in the fund.”

Megan Butler, executive director of supervision – investment, wholesale and specialist at the FCA, said: “We want to engage with fund managers and the investors whose money they manage to understand what problems they think exist. Specifically, in the context of open-ended funds we want people to consider how well the current rules address those problems, and what further regulatory intervention might be needed.”

Ryan Hughes, head of fund selection at AJ Bell, said: “The ideal scenario may be that the FCA, fund management industry and customers accept that offering daily trading in illiquid assets is not the right approach and ultimately not in investors best interests. The trouble is that there is no advantage for any fund manager moving first on this issue. This will only be solved by the FCA taking a strong lead.”

The FCA is seeking feedback by 8 May.