Bank of England mulls changes to fund withdrawals
Investors wanting to cash out quickly could face a penalty charge under new proposals.
Open-ended funds that allow investors to cash out quickly could face tougher new rules under suggestions brought forward by the Bank of England and the Financial Conduct Authority (FCA) after a series of high-profile missteps in the sector.
Investors who want to cash out within one day might have to take a discount on the money that they want to withdraw under the proposals.
Investors can get their money back almost immediately in many funds, forcing the fund to quickly sell off assets to pay up.
This is not a problem when it holds enough cash or highly liquid assets, such as shares traded on a major stock market.
This has the potential to become a systemic risk Mark Carney, Bank of England governor
However, when the fund has bought highly illiquid assets, such as property, which can take days, weeks or even months to sell, it can run into serious cash flow problems and be unable to meet promises to investors.
It also means that those who cash out first will be given the cash from the highly liquid assets, while those who wait will be disadvantaged.
“This has the potential to become a systemic risk as first mover advantage could prompt a rush to the exit,” said Bank governor Mark Carney.
Earlier this year, star fund manager Neil Woodford was forced to suspend his funds after too many investors started demanding their money back.
The funds are now being wound up, with administrators trying to sell off the assets at the best possible price.
Mr Woodford had poured cash into highly illiquid assets, making it impossible for him to meet demand for redemptions.
Earlier, M&G was forced to suspend trading in a real estate fund that it runs after investors cashed out faster than it could sell its properties.
Redeeming investors should receive a price for their units in the fund that reflects the discount needed to sell the required portion of a fund’s assets in the specified redemption notice period, ensuring fair outcomes for redeeming and remaining investors FCA and Bank of England
The new suggestions from the Bank and the FCA would aim to avoid repeats of such problems.
Under the proposals, investors wanting to take their cash out faster than the assets can be sold would have to take a loss on their investment proportional to the loss the fund takes from rapidly selling assets.
However, if they want to wait longer they could, without facing the same penalty.
“Redeeming investors should receive a price for their units in the fund that reflects the discount needed to sell the required portion of a fund’s assets in the specified redemption notice period, ensuring fair outcomes for redeeming and remaining investors,” they said in a statement.
The FCA and Bank said they now intend to review how to implement these new principles in a proportionate and effective way.
The conclusions will be released next year.
Mr Carney said he wanted to avoid restrictions on retail investors putting money into these funds, which can be very attractive.
Instead “they should know in advance, and have a realistic expectation of how long it will take to get their money out”, he said.