UK watchdogs propose major fund redemption changes
The UK’s financial watchdogs have said funds with hard-to-sell assets should ensure investors cannot withdraw their money at very short notice or should offer a lower price for redemptions.
The proposal came as part of a review into the sector following the failure of the flagship fund run by the once-lauded investor Neil Woodford, which shone a spotlight on so-called liquidity mismatch.
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Most open-ended investment funds offer one-day redemptions but contain assets that are illiquid – hard to sell quickly. This has the “potential to become a systemic risk”, the Bank of England (BoE) said, as funds can lose money in redemptions without being able to match it with asset sales.
In a joint statement, the Financial Conduct Authority (FCA) and the BoE said funds should follow a number of principles.
They said funds need to assess the liquidity of their assets by thinking about the price discount that might be needed to sell them quickly.
Investors looking to take their cash out of the fund should then receive a lower price, reflecting the discount needed to sell the assets. The FCA and BoE said funds could alternatively lengthen the redemption times they offer.
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The two financial watchdogs said they will develop rules next year to cover the way redemptions work at open-ended funds.
The principals the FCA and BoE outlined today are similar to the system recently taken up by the US Securities and Exchange Commission for its funds.
More to follow.