LONDON- Investors should have to wait longer for redemptions from funds with hard-to-sell assets like commercial property, or be prepared to take a hit on the cash they get back, the Bank of England said on Monday.
The BoE and the Financial Conduct Authority (FCA) published conclusions from a review into mismatches at many funds that promise daily redemptions even though they hold assets that are hard to sell easily or without a price hit in the time it takes to sell them.
BoE Governor Mark Carney has said that such funds are “built on a lie” given that it can take months to sell real estate, especially during an economic downturn.
Germany has already stopped daily redemptions from property funds. But Carney told reporters there was a strong desire not have outright restrictions on retail investors putting money into illiquid assets like property
Retail investors should be fully-informed in advance that they are not putting money into a bank account, Carney said.
The review was prompted by the closure of a flagship fund run by former star stock picker Neil Woodford, which has trapped hundreds of thousands of investors for over six months.
Some of Woodford’s assets were listed on an exchange Guernsey and Carney said listing was not a sufficient test for liquidity.
The suspension in June of the now shuttered Woodford equity fund, and the suspension by M&G of a property fund in recent weeks, has thrown the spotlight on the ability of funds to meet daily redemptions.
The BoE and the FCA they would publish their review next year based on principles published on Monday. This will include new rules for redemptions at open-ended funds, most of which offer daily redemptions to investors,
“The review will now consider how these principles could be implemented in a proportionate and effective manner,” the BoE and FCA said in a joint statement on Monday.
The mismatch seen between redemption terms at some funds and their liquidity has the “potential to become a systemic risk,” the BoE said.
The BoE and FCA said liquidity in assets should be assessed by looking at the price discount needed for a quick sale, a system the U.S. Securities and Exchange Commission has recently adopted for U.S. funds and which Carney said was a sensible approach.
Investors seeking redemptions should receive a price for their units in the fund that reflects the discount needed to sell enough assets to meet the redemption period, the regulators said.
Otherwise, redemption periods should be longer to reflect the time needed to sell assets without a discount, they said.
“Redemption notice periods should reflect the time needed to sell the required portion of a fund’s assets without discounts beyond those captured in the price received by redeeming investors,” the BoE said.
There are no barriers to funds that want to change their redemption terms and industry body The Investment Association is already working on similar proposals.
The IA said it looked forward to working with the BoE and FCA to review liquidity management processes.
The BoE believes that by having more realistic redemption terms up front for investors, it will be easier for asset managers to sell funds in illiquid long-term assets like infrastructure that can boost the broader economy.
British regulators hope that in the meantime they can persuade global regulators to take up their approach on redemptions.
(Content and photos syndicated via Reuters)
