FCA mulls new rules for funds holding illiquid investments

New rules could be introduced for open-ended funds that hold illiquid investments, according to the head of the Financial Conduct Authority.

New rules could be introduced for open-ended funds that hold illiquid investments, according to the head of the Financial Conduct Authority.

In the wake of the suspension of Woodford Equity Income, new rules could be introduced for open-ended funds that hold illiquid investments, according to Andrew Bailey, the head of the Financial Conduct Authority.

Following a wave of investors pulling out their money, Woodford Equity Income suspended trading, being unable to sell unlisted stocks fast enough to meet redemptions.

That bought to the surface renewed concerns over investment funds holding illiquid assets while promising daily liquidity to their investors.

To address this, Bailey, writing for the Financial Times, suggested the FCA may consider banning daily withdrawals for funds that hold such illiquid assets. He said:

"It is not sensible to provide for daily dealing and redemption in open-ended funds that hold a large exposure to illiquid assets, including those that while listed are not regularly traded."

Bailey also suggested that funds should not be able to skirt regulations by listing stocks in different jurisdictions.

This was in reference to the decision taken by Woodford to list certain assets on the Guernsey stock exchange to avoid breaching the rule limiting open-ended funds to having just 10% in unlisted companies.

Bailey wrote in the Financial Times:

"Simply listing an unquoted company overseas does not in itself make the stock liquid. I am a strong supporter of internationally open markets. But investors have a right to choose the jurisdiction in which they invest and for it to be maintained."

These considerations, he said, would form part of new rules being developed by the FCA in response to a series of property fund suspensions in June 2016 following the Brexit vote. Similar to what happened to Woodford Equity Income, property funds were unable to sell their holdings fast enough to cover redemptions.

Other regulators have also weighed in following the Woodford suspension. Without mentioning Woodford specifically, Bank of England Governor Mark Carney recently told an audience in Tokyo:

"Over half of investment funds have a structural mismatch between the frequency with which they offer redemptions and the time it would take them to liquidate their assets."

Carney said that "stress simulations" were currently being developed by the Bank of England.

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