Investors could be blocked from pulling out their cash at short notice unless they are willing to take a hit on the value of their investment, the Bank of England has warned.
Proposals put forward by City regulators will put the investment sector back in the spotlight after the gating of one of the UK’s largest property funds this month and the high-profile collapse of Neil Woodford’s investment empire.
The Bank of England and the Financial Conduct Authority are considering new rules for the industry after an initial review found problems in the way funds measure and communicate their liquidity – or how easy it is to sell and redistribute funds to investors.
Woodford’s flagship fund was initially suspended in June because of a surge in redemptions that he could not not keep up with as investors rushed to pull out their money after a series of poor market bets. Among the problems Woodford faced was the proportion of unlisted assets in his Equity Income Fund, which was meant to have a very small amount of illiquid holdings.
It meant Woodford could not sell the assets quick enough to meet redemption requests, resulting in the suspension and eventual wind-down of the fund.
The Bank of England governor said the rules were meant to address the “mismatch” between redemption terms and liquidity. He said the current system had a “first-mover advantage” where customers have a better chance of getting their cash back in full if they pull their money first. That incentive could cause a run on funds.
“This has the potential of becoming a systemic risk, as first-mover advantage could cause a destabilising rush towards the exit,” Mark Carney said.
While liquidity usually measures how much of the fund is invested in listed assets such as stocks, the regulators said liquidity should actually measure the amount of cash that they could realistically get back during a quick sale.
Alternatively, asset managers would have to stop offering daily redemptions – meaning investors would have to give longer notice periods if they wanted to pull their cash, unless they were willing to accept steep discounts on the value of their funds.
The FCA said the review’s full findings, to be released next year, would help it formulate new rules for open-ended funds.
