The governor of the Bank of England Mark Carney blasted funds like Neil Woodford’s today which he said were “built on a lie”.
Woodford’s flagship £3.7bn Equity Income Fund was frozen earlier this month after it was hit by a wave of withdrawals it could not meet.
Carney told MPs on the Treasury Committee that the way these types of funds are regulated should be changed.
“These funds are built on a lie which is that you can have daily liquidity for assets that fundamentally aren’t liquid,” he said.
Carney said offering clients instant access to their money from funds that were illiquid could make investors complacent about risk.
The current approach “leads to an expectation for individuals that it’s not that different from having money in a bank,” he said.
“We do have to be very deliberate about the types of measures that need to be taken — something that better aligns the redemption terms with the actual liquidity of the underlying investment is infinitely preferable to the situation we have today,” he said.
Carney warned that the risks that could build up in illiquid funds could cause a serious economic shock.
“This is a big deal. You can see something that could be systemic,” he said.
Carney also said markets were increasingly worried about the prospect of a no-deal Brexit.
“Market expectations of no deal have gone up in recent months,” he said.
“The degree of uncertainty [for businesses] is as high as it was just prior to the 29 March deadline. If you squint marginally it’s gone up a bit.
“As best as I can tell, this uncertainty effect that has been weighing on business, and particularly business investment, is continuing to operate.
“Expectations of no deal have gone up in markets, that uncertainty is still there for business and that is affecting the short term economic performance.”
He hinted that the Bank would cut interest rates if the UK left the EU without a deal.
“It’s more likely that we would provide some stimulus in that event [no-deal Brexit],” he said
Carney said the Bank had not included no-deal Brexit risks in its economic forecasts, noting that both Conservative Party leadership candidates – Boris Johnson and Jeremy Hunt – had said it was preferable to reach a deal with the EU if possible.
“In the event that the policy of the government were to switch, the forecast of the Bank of England would switch accordingly,” he said.