AIC supports FPC on liquidity mismatch in open-ended funds

The Association of Investment Companies (AIC) has responded to the Bank of England’s publication today of the March meeting of the Financial Policy Committee (FPC). The publication was accompanied by the joint Bank of England and Financial Conduct Authority (FCA) report, ‘Liquidity management in UK open-ended funds’.  

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said: “The report’s findings are yet another important warning of the dangers of open-ended funds investing in illiquid assets. This is timely as policymakers are currently considering greater use of open-ended funds to hold less liquid assets, for example through the proposed Long-Term Asset Fund (LTAF). The conclusion that fund managers appeared to be too optimistic about how quickly they can sell holdings is particularly worrying. Without effective regulation to ensure more realistic assessments of liquidity, there is a risk that liquidity mismatches in open-ended funds will increasingly present a threat to financial stability.  

“Looking at consumer protection, retail investors are particularly at risk of being left holding open-ended funds with declining liquidity and growing structural problems. The report indicates this is because institutions tend to react more swiftly and head for the exit first when funds are under stress.

“The FPC highlights that for funds investing in highly illiquid assets swing pricing may not work effectively and longer notice periods are a better alternative. This accords with the AIC’s view that longer notice periods are crucial to address the risk posed by the liquidity mismatch in open-ended funds.”