The governor of the Bank of England Mark Carney blasted funds like Neil Woodfords today which he said were “built on a lie”.
Woodfords flagship £3.7bn Equity Income Fund was frozen earlier this month after it was hit by a wave of withdrawals it could not meet.
Carney told MPs on the Treasury Committee that the way these types of funds are regulated should be changed.
“These funds are built on a lie which is that you can have daily liquidity for assets that fundamentally arent liquid,” he said.
Carney said offering clients instant access to their money from funds that were illiquid could make investors complacent about risk.
The current approach “leads to an expectation for individuals that its not that different from having money in a bank,” he said.
“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,” he said.
Carney warned that the risks that could build up in illiquid funds could cause a serious economic shock.
“This is a big deal. You can see something that could be systemic,” he said.
Carney also said markets were increasingly worried about the prospect of a no-deal Brexit.
“Market expectations of no deal have gone up in recent months,” he said.
“The degree of uncertainty [for businesses] is as high as it was just prior to the 29 March deadline. If you squint marginally its gone up a bit.
“As best as I can tell, this uncertainty effect that has been weighing on business, and particularly business investment, is continuing to operate.
“Expectations of no deal have gone up in markets, that uncertainty is still there for business and that is affecting the short term economic performance.”