The Financial Markets Authority (FMA) is keeping a watching brief on the Woodford Investment Management fund freeze fiasco unfolding in the UK but sees little flow-over effects for NZ.
Woodford shuttered its flagship £3.7 billion Equity Income Fund in May citing liquidity concerns as a flurry of investors head for the exit.
The fund freeze – extended for another month in July – prompted an outcry from investors, media and regulators about how Woodford skirted supposedly tough liquidity rules.
In June, Bank of England governor, Mark Carney, warned that many investors were unaware of liquidity risks in some funds.
“These funds are built on a lie, which is you can have daily liquidity,” Carney told the UK parliament. “… 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.”
Last week Woodford also embarked on a staff-cutting exercise as fund outflows and lost mandates (to the tune of £4 billion) continued to bite.
In a statement, the NZ regulator said: “The FMA follows developments around the world, including the developments in the UK around Mr Woodford’s funds and their issues with liquidity.
“Whilst the liquidity profile of Mr Woodford’s funds would be markedly different to KiwiSaver funds, the [managed investment scheme] MIS regulations do specifically cover liquidity and the FMA monitors retail managed funds, including KiwiSaver, for such matters.”
According to the FMA, MIS funds must offer and redeem products “continuously” based on underlying investment valuations or have at least 80 per cent of their investments in daily-redeemable debt securities (or in fixed term deposits to a maximum of three months) or in other assets that can be cashed in within 10 working days.
MIS managers must also comply with their statements of investment policies and objectives (SIPO) as well as “act in the best interests of the scheme participants and treat the scheme participants equitably, and comply with relevant professional standard of care”, the regulator says.
Meanwhile, the UK regulator, the Financial Conduct Authority (FCA) last week also proposed a ban on the “sale, marketing and distribution of derivatives and exchange traded notes referencing cryptoassets to all retail consumers”.
“We believe that retail consumers can’t reliably assess the value and risks of derivatives (contracts for difference, futures and options) and exchange traded notes (ETNs) that reference certain cryptoassets,” the FCA says.
Crypto-derivatives were particularly risky in retail hands due to the;
- inherent nature of the underlying assets, which have no reliable basis for valuation;
- prevalence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the secondary market for cryptoassets;
- extreme volatility in cryptoasset prices movements; and,
- inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them.
“We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products,” the UK regulator says in a release.
The FCA says the ban could reduce retail investors losses by up to £234.3 million each year.
Christopher Woolard, FCA head of strategy and competition, said in a statement: “As with our work on the wider [contracts for difference] CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.”
At the same time, the FCA also finalised rules for how CFDs – essentially leveraged bets on the future prices of a broad range of securities – are marketed to retail investors.
Among the new rules, CFD providers will have to limit leverage to between 30:1 to 2:1 depending on the volatility of underlying assets, and close out client exposures “when their funds fall to 50% of the margin needed to maintain their open positions”.