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On 11th July, the Bank of England published its Financial Stability Report and the associated Record of Financial Policy Committee meeting which discussed its view of the stability of the UK financial system.
Both the report and the minutes address open ended funds investing in illiquid assets, which in the report is titled, "Tackling vulnerabilities in open-ended funds". It recognises the potential risks where the abilty to redeem units in a fund does not match the ability to sell assets to meet those redemptions. For property funds, this is a topic that has been the subject of ongoing discussion with the FCA since the liquidity challenges faced by retail funds following the EU referendum.
The minutes include a slightly cryptic comment on the February 2017 IOSCO report (see page 4 of this bog). It does suggest an approach closer to the IOSCO recommendations than had been evident in the more recent FCA proposals.
The report concludes on this matter that The Bank and the FCA will together assess how funds’ redemption terms might be better aligned with the liquidity of their assets in order to minimise financial stability risks without compromising the supply of productive finance. It is not clear how this will differ from the previous FCA consultations. We will continue to push for a redemption deferral mechanism for open ended retail funds.
Estates Gazette article
An article by John on the implications of the Woodford scandal on property funds appeared in Estates Gazette on 19th June 2019. You can read it here.
b) Announcements from the FCA in respect of the prolonged consultation process on open-ended property funds is expected very shortly. We will comment as soon as the FCA publishes something;
c) The "patient capital" initiative is likely to be slower moving than the consultation on open-ended funds, but potentially more far-reaching in its impact. Again, we will monitor developments and report;
d) As mentioned above, John is now part of the working group for the AREF / INREV Open Ended Fund Pricing Project. This is intended to reach its conclusions in the Autumn.
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31st May 2019
Brief July update
Problems in funds managed by Neil Woodford's Woodford Investment Management once again shone a spotlight on funds investing in illiquid assets. The Woodford suspension highlights an important point that a number of submissions to the FCA have made – investors understand that property is a less liquid investment asset, but there may be greater problems with investments in assets that are in theory more liquid, but are not in practice.
The events at Woodford prompted a reaction by both the FCA and the Bank of England. The FCA, which had been close to publishing its conclusions following the consultation on open-ended funds and illiquid assets referred to earlier in this article, delayed its response to reflect lessons from Woodford.