The Bank of England is launching a review into the £1.2 trillion open-ended fund market in a bid to safeguard financial stability in the wake of the Neil Woodford scandal, it said today.
Fallen stockpicker Woodford gated his £3.7 billion flaship Equity Income Fund, stuffed with illiquid smaller companies, to withdrawals last month, trapping thousands of investors.
The Bank and the Financial Conduct Authority are set to examine short-notice withdrawals from funds where investment assets such as commercial property can’t be sold quickly at the market price.
The Bank’s financial policy committee, chaired by Governor Mark Carney, said “the mismatch between redemption terms and the liquidity of some funds’ assets has the potential to become a systemic issue”.
Its Financial Stability Report noted major redemptions early this year amid Brexit uncertainty. Alongside Woodford, a bond fund run by asset manager H2O also sparked concern after billions of dollars worth of withdrawals in a matter of days.
The central bank and the FCA will look at the “costs and benefits of aligning redemption terms, including pricing and notice periods, with the typical time it takes to realise market prices for funds’ assets in normal and stressed market conditions”. Options could involve banning one-day withdrawals in some cases to avoid a run on the funds.
The Bank added that daily redemptions can give an “incentive for investors to redeem when they expect others to do so”, creating a “self-reinforcing dynamic” which can lead to so many investors rushing to redeem that funds have no choice but to suspend all withdrawals”.
The mere fear of possible suspension also reinforces the incentive to withdraw funds, it added.
Threadneedle Street’s financial stability report noted UK banks hold enough capital to cope with a simultaneous disorderly no-deal Brexit and global trade war, but added that the “perceived likelihood” of a no-deal Brexit had increased since the start of the year.
