U.S. Markets

UK fund suspensions raise questions about daily cash calls: watchdog

LONDON (Reuters) - Although this week’s suspensions of UK property funds were due to fallout from coronavirus rather than cash calls, they raise “legitimate questions” about offering daily redemptions, the Financial Conduct Authority said on Thursday.

Several property funds that offer daily redemptions have suspended themselves after valuers said it was not possible to adequately price the real estate assets they contain.

“We are now in the midst of an unprecedentedly difficult time for funds, as for others,” Edwin Schooling Latter, director of markets for the Financial Conduct Authority, said in a call to the Investment Association on Thursday.

Other funds were suspended last year, notably the flagship equity fund run by former star stockpicker Neil Woodford which had too many requests for daily redemptions and was unable to sell illquid assets fast enough. It closed four months later.

“Recent experiences may help rational and well-advised investors to recognize that daily redemption funds are unlikely, however, to be the safest or most profitable way of investing in less liquid assets.”

The FCA and the Bank of England have already announced they are assessing possible regulatory changes so that redemptions periods at funds are better “matched” with how fast they could sell assets. They are expected to give an update in June.

“In our view, the case for preventing the emergence of new open-ended funds with asset-liability mismatches and without the right tools to manage them is strong,” Schooling Latter said.

“But we need to be sensitive in addressing risks in existing funds.”

How long redemption periods should be for funds that hold illiquid assets was unclear, but should not necessarily be as long as it takes to sell the most illiquid asset, Schooling Latter said.

“We would like an open debate with stakeholders about where the right balancing point lies,” he said.

Regulators are also looking at ways to measure liquidity in funds and the U.S. regime based on ‘bucketing’ assets into four categories offers a “useful experience”, he said.

Reporting by Huw Jones; editing by David Evans