FCA boss Andrew Bailey said fund rules may need amending in the wake of the Woodford fund suspension.

In a letter penned for the Financial Times, Bailey said the suspension of the £3.7 billion fund had raised important questions about the UK’s regulatory approach towards investment in illiquid assets.

Woodford was forced to suspend daily dealing in the fund as redemptions spiked. This resulted in the percentage of the fund’s exposure to illiquid unquoted assets rising to a level where it could struggle to meet redemptions.

Bailey stressed financial markets should support investment in firms that contribute to economic growth and create jobs, which in turn foster innovation. However, he noted that these businesses can often be illiquid and not all will succeed.

We need appropriate rules around investments in illiquid securities to protect investors,’ Bailey wrote.

‘I believe there should be limits on the share of illiquid investments held in collective investment schemes whose shares are typically bought and sold freely and frequently.’

Bailey admitted Woodford’s inability to meet withdrawals raised questions as to whether the rules requiring assets to be liquid are working appropriately.

‘The Woodford fund points to a potential problem with the limits on illiquid assets: the purpose of these limits is to ensure that the fund remains liquid,’ he said.

I also think it is not sensible to provide for daily dealing and redemption in open-ended funds that hold a large exposure to illiquid assets, including those that while listed are not regularly traded.’

Bailey indicated the regulator is also examining the role platforms played in the crisis.

‘The use of platforms by investors has grown rapidly in recent years. It is important that platforms should exercise their responsibilities thoroughly and in a timely fashion,’ he said.

‘The Woodford episode raises important issues for markets and regulators. But we must not lose sight of the importance to our economy of supporting illiquid investments that will be vital to our future growth and success.’

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