Woodford scandal triggers Bank of England review of open-ended funds

The Bank of England is launching a review into the £1.2 trillion open-ended fund market in a bid to safeguard financial stability in the wake of the Woodford scandal, it said today.

Fallen stockpicker Woodford gated his £3.7 billion flagship Equity Income Fund, stuffed with illiquid smaller companies, to withdrawals last month, trapping thousands of investors.

The Bank will work with the Financial Conduct Authority on the review, which will focus on the risks caused by funds that let investors pull money out immediately despite being backed by assets which are difficult to sell quickly. The mismatch “has the potential to become a systemic issue” according to the Bank’s Financial Policy Committee.

Governor Mark Carney said that the woes hitting Neil Woodford, who closed his fund after Kent County Council demanded £250 million back, were “symptomatic of a broader problem”.

Carney had been keen to see “collective action” at a global level after agreement by the G20’s Financial Stability Board two years ago, but has launched the review after a lack of action. “We got a high-level agreement two years ago, but we’re disappointed in how that has been translated into actual action — that global process had made some progress but not sufficient progress,” he said. Alongside Woodford, a bond fund run by asset manager H2O also sparked recent concern after billions of dollars’ worth of withdrawals in a matter of days.

Options to be examined could involve banning one-day withdrawals in some cases to avoid a run on funds.

The Bank said daily redemptions can give an “incentive for investors to redeem when they expect others to do so”, creating a “self-reinforcing dynamic” where so many investors rushing to redeem that funds have no choice but to suspend all withdrawals. The mere fear of possible suspension also reinforces the incentive to withdraw, it added.

The Bank’s financial stability report said UK banks hold enough capital to cope with a simultaneous disorderly no-deal Brexit and global trade war, but added the “perceived likelihood” of a crash-out has risen since the start of the year.