The Bank of England will investigate the potential risks of funds like beleaguered trader Neil Woodford’s suspended investment vehicle.
Fund managers are currently able to offer investors daily liquidity when their savings are actually tied up in illiquid and unquoted stocks, which are difficult to transfer quickly into cash.
Woodford’s Equity Income fund was suspended indefinitely after a spike in redemption requests, leaving investors unable to access their money.
Speaking today as the Bank of England launched its Financial Stability Report deputy governor Jon Cunliffe said it will explore how to “better align the liquidity and the underlying asset with the redemption promise given by the fund.”
The central bank will work with the Financial Conduct Authority on its recommendations.
Cunliffe said: “So long as everybody else in the market is offering it [daily liquidity]… it’s difficult for one fund not to offer it.
“For many people these funds are long term investments. If you’re leaving your money there for a long time you don’t really need to be moving it around on a daily basis so it’s not clear just how strong the consumer demand for absolute daily liquidity is.”
Bank of England governor Mark Carney last month slammed open ended funds.
He told the Treasury Select Committee that the funds were “built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid”.
Carney said offering clients instant access to their money from funds that were illiquid could make investors complacent about risk.