Bank of England Launches Review of Open-Ended Funds

Bank and the FCA to review open-ended funds amid fears that lack of liquidity and redemptions could pose a threat to the financial system

James Gard 11 July, 2019 | 2:31PM

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The Bank of England has launched a review into open-ended funds in the wake of the Woodford saga that sees investors still trapped in his flagship equity income fund.

The Bank plans to work with the Financial Conduct Authority to address risks to the financial system from the “vulnerabilities” in the make-up of open-ended funds. The Bank’s financial policy committee, which compiles the financial stability report, warns that there remains a “mismatch” between redemption terms and the liquidity of funds’ assets. The Bank and the FCA are looking at ways the two can be better aligned to minimise financial risks “without compromising the supply of productive finance”.

Daily redemptions for open-ended funds, the Bank says, “can create an incentive for investors to redeem when they expect others to do so”.

“This self-reinforcing dynamic can lead to so many investors rushing to redeem that funds have no choice but to suspend all redemptions. Furthermore, fear of possible suspension reinforces the incentive to redeem.”

The review will look at the costs and benefits of treating all investors equally, especially with pricing and notice periods.

The FCA has faced criticism that it was too slow to react to events that led to the Woodford fund being “gated” in early June. The fund remains suspended after a review at the 28-day stage earlier this month.

Earlier in the week, it emerged that investors in the Woodford Equity Income fund were having trouble transferring their holdings between investment platforms. Although investors in the fund are unable to sell their units, or buy new ones, they should be able to transfer the frozen assets to different providers. Authorised corporate director Link confirmed that transfers between platforms “will now be allowed with immediate effect”.

The Bank of England's financial stability report looked at a range of topics, but focused largely on how resilient the UK financial system will be when Britain leaves the EU, particularly in the case of a no-deal Brexit. The Bank concluded that the banking system remains strong enough to lend through the “wide range of UK economic and financial shocks” during Brexit – but that volatility in asset prices is to be expected.

 

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About Author

James Gard  is content editor for Morningstar.co.uk

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