Caroline Binham in London
UK lenders in good state to withstand any turmoil, report concludes
The Bank of England has warned that the perceived risk has risen of a no-deal Brexit, which would bring with it “material risks of economic disruption” and “significant” market volatility.
The UK economy is already feeling the effects of a Brexit-related slowdown as uncertainty hits sterling exchange rates and the prices of UK-focused equities, the BoE said on Thursday in its twice-yearly update on the resilience of the UK’s financial sector. It also promised a crackdown on open-ended funds in the wake of several high-profile episodes.
The BoE pointed to a marked drop in foreign investment — what governor Mark Carney has previously dubbed “the kindness of strangers” — because of Brexit-related uncertainty, with foreign investment in UK commercial real estate in the first quarter of 2019 just 38 per cent of the 2018 average.
But the BoE concluded that UK lenders could withstand the double whammy of a cliff-edge Brexit coupled with a protectionist-driven trade war that led to a global slowdown.
The BoE’s warnings come as rhetoric has grown around a no-deal Brexit during the Conservative leadership contest, with Boris Johnson, the favourite to be the UK’s next prime minister, pledging that the UK will leave the EU on October 31 “come what may”. Sterling fell to its lowest since April 2017 in response.
Open-ended funds are also in the sights of the BoE’s Financial Policy Committee, which has pledged to put its pricing structures under review alongside the markets watchdog, the Financial Conduct Authority. The review comes in the wake of high-profile episodes involving investment funds, including that of Neil Woodford’s flagship equity fund, where £3.7bn of investor money is still frozen.
The FPC is particularly concerned about the mismatch between funds offering daily redemptions to investors but holding assets that can take months to sell at market value, such as commercial real estate. Mr Carney told politicians last month that such funds were “built on a lie”.
“The bank and the FCA review will examine the costs and benefits of aligning redemption terms, including pricing and notice periods, with the typical time it takes to realise market prices for funds’ assets in normal and stressed conditions,” Thursday’s report reads.
The review could ultimately end in the FCA creating new rules around what prices to offer investors who want to redeem compared with those who remain in the fund.
Copyright (C) 2019 The Financial Times Ltd. All rights reserved.