Bank of England Recommends Tighter Rules on Money Managers

(Bloomberg) --

The Bank of England called for new restrictions on money managers after liquidity crunches at funds run by Neil Woodford and M&G Plc highlighted the risks of daily-dealing funds that hold hard-to-sell assets.

The central bank and the Financial Conduct Authority said new measures are needed to ensure consistency between the time it takes funds to sell assets and the frequency of client redemptions. The regulators called for new steps to assess the liquidity of funds’ holdings that better account for the price plunge they’d see if they had to rush to dump assets.

New U.K. rules, which will be under debate next year, could lead to longer notice periods before investors can redeem their money from certain funds. They could also lead to investors who race to redeem their money getting a lower price.

“It’s not the equivalent of having a bank account and having instant access to the fund,” BOE Governor Mark Carney said on Monday. “That shouldn’t be something that investors find out in a gating situation or in a severe situation. That is something they should know in advance.”

Woodford Shock

The BOE’s move comes at the end of a year of rising concerns among regulators and politicians that funds are pursuing yield by investing in thinly traded assets, which can be hard to sell at short notice to raise cash to meet redemptions. Carney has said some funds are “built on a lie” by claiming to offer daily withdrawals.

The push for tougher regulation gained urgency after Woodford shocked the financial world by suspending withdrawals at his flagship fund in June. Not long after that, Natixis SA-backed H2O Asset Management faced nearly 8 billion euros ($8.9 billion) of outflows amid concerns over its holdings of bonds related to German financier Lars Windhorst.

M&G Plc became the latest investment business to face scrutiny when it froze withdrawals from its flagship U.K. real estate fund because of exposure to retail properties that had plummeted in value.

“The mismatch between redemption terms and the liquidity of some funds’ assets means there is an advantage to investors to redeem ahead of others, particularly in a stress,” the BOE’s Financial Policy Committee said in a report. “This has the potential to become a systemic risk.”

In the report, the BOE said that the liquidity of funds’ assets should be measured either as the discount that would be incurred in a quick sale of a sample of assets, or as the time needed to sell the assets without a steep price decline. The price investors get for their units should reflect the discount required to sell assets within the redemption notice period, the bank said.

“In addition to enhancing U.K. financial stability, these changes should also promote funds’ ability to invest in illiquid investments, helping to increase the supply of productive finance to the economy through the business and financial cycles,” the BOE said.

--With assistance from Paul Gordon.

To contact the reporters on this story: Silla Brush in London at sbrush@bloomberg.net;Lucca de Paoli in London at gdepaoli1@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Brian Swint, Patrick Henry

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