Bank of England boss Mark Carney has condemned investment funds with assets that cannot be sold easily but offer instant withdrawals as being “built on a lie” after the Woodford fund saga.
The Bank governor told MPs that funds with a so-called liquidity mismatch pose a potential risk to the financial system in the UK and worldwide.
“This is a big deal. You can see something that could be systemic,” he told the cross-party Treasury Select Committee.
“These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.
“And that leads to an expectation of individuals that it’s not that different to having money in a bank.”
His comments come after thousands of investors have seen their cash trapped in investment guru Neil Woodford’s flagship equity income fund after it was suspended on June 5.
The fund was gated after millions of pounds had been taken out following a run of poor results.
In a hearing on the Bank’s recent inflation report, Mr Carney told MPs that together with fellow policymaker Sir John Cunliffe, they had been seeking to raise the issue of liquidity mismatch at a global level since 2015.
He said regulations needed changing to prevent these funds offering investors the prospect of instant access to their cash.
This needs to be a globally co-ordinated action to address this problem, he cautioned.
But he added: “If we can’t get the world to move on it, we’ll have to take our own responsibility here in co-ordination with the FCA (Financial Conduct Authority).
“We do have to be very deliberate about the types of measures that need to be taken — something that better aligns the redemption terms with the actual liquidity of the underlying investment is infinitely preferable to the situation we have today.”
The warning follows calls for an overhaul of “flawed” EU regulations surrounding the funds from FCA chief executive Andrew Bailey on Tuesday.
Mr Bailey – seen as a frontrunner to replace Mr Carney when he steps down in January – told MPs that managers of the Woodford fund were “using the rules to the full” and exploiting loopholes.
Due to many of the investments in the Woodford fund being made into unlisted companies, selling the shares to repay the cash has proved difficult.
The fund was worth around £10 billion at its peak in 2017, but has fallen to between £3.5 billion and £4 billion.
The FCA has launched an enforcement investigation into the Woodford saga.
It is also due to review the suspension of the fund next week under the 28-day deadline.