LONDON (Reuters Breakingviews) - Andrew Bailey’s chances of becoming the Bank of England governor have taken another hit. The boss of Britain’s Financial Conduct Authority once seemed a strong candidate to succeed Mark Carney as head of the central bank, until UK fund suspensions brought the watchdog’s oversight into question. A new case underscores the problems caused by the FCA’s failure to tackle inappropriate promises of liquidity.
M&G Investments on Wednesday suspended dealing in its 2.5 billion pound flagship property fund, citing “unusually high and sustained outflows” prompted by political uncertainty and structural shifts in the UK retail sector, which made it hard to sell commercial property. The so-called gating allows the vehicle’s managers to raise cash for redemptions without having to offload its office buildings and shopping malls at fire-sale prices. Those who invested in the fund expecting to be able to buy and sell on a daily basis are now trapped for the foreseeable future.
In one sense they only have themselves to blame. Several open-ended property vehicles had to pull up the drawbridge after Britons voted to leave the European Union in 2016. UK funds that invest directly in real estate on average hold 16% of assets in cash, according to Morningstar data cited by Liberum. It should therefore be obvious that not all investors can sell out at once, since the underlying assets might take months or years to shift.
But that raises the question of why the ephemeral impression of liquidity should be tolerated at all. The FCA has a mandate to protect consumers, who are not as savvy as institutional investors. Yet in September it proposed a relatively lame set of rules for “funds investing in inherently illiquid assets”, which centred on increased transparency and disclosure of liquidity risks.
Bailey might argue that suspensions aren’t so bad. Yet they are certainly worse for retail investors than the alternatives. One would be to limit how frequently investors can deal, so it’s known in advance that they can only buy or sell on, say, a monthly or annual basis. Then there would be no ambiguity about liquidity. Another option might be to convert the funds to listed investment trusts. In this case, the cost of exiting quickly would be set by market forces, making liquidity risks evident. The FCA could in theory pick one of these alternatives. That won’t remove the stain left on Bailey’s resume.
- British fund group M&G Investments on Dec. 4 suspended dealing in its flagship open-ended UK property fund, blaming uncertainty about Britain’s departure from the European Union for a surge in investor requests to cash out.
- It said that unusually high and sustained outflows from the 2.5 billion pound ($3.21 billion) M&G Property Portfolio coincided with a period of continued Brexit-related political uncertainty.
- The fund firm also said ongoing structural shifts in Britain’s retail sector had made it difficult to sell large assets. “Given these circumstances, we have now reached a point where M&G believes it will best protect the interests of the funds’ customers by applying a temporary suspension in dealing.”
(Editing by Swaha Pattanaik and Karen Kwok)
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