The Bank of England will do more to scrutinise investment funds to protect those who invest in them in future, according to chairman Mark Carney.
The announcement came just days after the Woodford incident, in which stock picker Neil Woodford blocked investors in his Equity Income Fund from withdrawing their investment.
Mr Carney was speaking to an audience at the Institute of International Finance Spring Meeting, in Tokyo, when he moved on to the high levels of risk currently associated with investment funds. Carney warned that the lack of liquidity currently involved in some funds was a danger and touched on “analogous situations” being the tip of the iceberg if these funds weren’t properly regulated.
“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” said Carney.
“Under stress they may need to fire sell assets, magnifying market adjustments and triggering further redemptions, a vicious feedback loop that can ultimately disrupt market functioning.”
Carney warned that while trillions of assets were held in liquid investment funds, the true extent of how much was potentially illiquid was an unknown and pointed to the shoring up of the banks after the 2008/09 financial crisis as the next step for the investment fund market.
The next step is stress simulations, to ascertain to the level of risk at different investment totals and in different countries, with the BoE looking after the UK’s exposure.