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‘Built on a Lie’ Mutual Funds Headed for Tougher Rules in U.K.

Silla Brush

(Bloomberg) -- The Bank of England is laying the groundwork for tougher restrictions on the mutual fund industry after crises at funds run by Neil Woodford and H2O Asset Management exposed the mismatch between investing in hard-to-sell assets and offering investors easy withdrawals.

Funds have a “structural flaw” when they hold less liquid investments yet continue to allow daily redemptions, Alex Brazier, the central bank’s executive director for financial stability strategy and risk, said in a speech in Edinburgh. Brazier’s comments follow Governor Mark Carney’s suggestion that these funds are “built on a lie.”

The open-ended fund industry has doubled in size since the financial crisis a decade ago and the funds hold at least a quarter of the corporate bonds issued by U.K. business since 2008, according to Brazier. The BOE and U.K. Financial Conduct Authority are now assessing how funds’ redemption terms could be better aligned with the liquidity of their assets.

“Their stability has economic significance,” Brazier said. “It has the potential to become a systemic issue.”

Brazier said funds could be offered at a price based on quick-sale valuations of the assets, or redemption terms could be adjusted to consider the time it takes to sell a fund’s assets and get quoted market prices in a stressed situation.

To contact the reporter on this story: Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell, Marion Dakers

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