BoE eyes reform to make long-term investment more attractive
More realistic curbs on investors wanting to pull cash from funds could make investing in infrastructure more attractive and bolster economic growth, a senior Bank of England (BoE) official said on Monday.
The decision by high-profile British fund manager Neil Woodford to suspend his flagship equities fund has thrown a spotlight on such funds that offer daily redemptions.
The Woodford fund was unable to meet heavy demand from investors wanting their cash back even though it advertised itself as offering daily redemptions.
Alex Brazier, the BoE’s executive director for financial stability, said investors had long favoured putting money into funds that offer daily redemptions.
This has made it harder for funds in infrastructure and other “illiquid” or long-term assets to compete as they are unable to offer such speedy redemptions, Brazier said.
“So the unlevel playing field could have been a barrier to greater investment in patient forms of capital, a central tenet of the government’s framework for raising productivity,” Brazier said in a speech in Edinburgh.
For a “fair and transparent fight” between types of funds, the risk of suspension or dilution would be properly factored into the pricing and redemption terms of open-ended funds, Brazier said.
This could make funds that invest for the long term look relatively more attractive, Brazier said.
Following the Woodford suspension, the Bank of England, said it was looking how redemption terms in open-ended funds can better match the amount of time it takes to sell assets to raise cash.
“Pretending such investments are liquid when they are not creates dangers,” Brazier said.
As the BoE review continues, “we intend to have in mind not just how reform could promote financial stability, but also how it can promote the supply of productive finance too,” Brazier said.
He reiterated the BoE’s stance that the core of Britain’s banking system could still continue to serve the economy, whatever form Brexit takes on Oct. 31. Markets are increasingly betting on a “no-deal” Brexit, given no divorce settlement has been agreed with the European Union.
Some backers of Brexit see Britain’s departure from the EU as an opportunity to revisit financial rules that are currently written in Brussels.
Brazier said the way the EU bakes detailed rules into primary legislation meant they are “inflexible”, but there is no need to weaken their substance.
“Looking ahead, we’ll need a level of resilience in our system in future that’s at least as great as currently planned,” Brazier said.