The Central Bank of Ireland has quietly stepped up its monitoring of the UK investment market over concern that Brexit uncertainty could spark large, destabilising outflows from mutual funds sold in Britain.
The central bank sent a confidential request, seen by FTfm, to fund administration companies in December instructing them to provide “immediate notification” of any large-scale mutual fund withdrawals.
“As part of the central bank’s Brexit preparedness, we are increasing the monitoring of investment fund liquidity,” it said.
It has instructed fund administrators to give details of any withdrawals of 5 per cent or more of an Irish domiciled fund’s value on a single day or cumulative redemptions of 10 per cent over five business days. It also asked for immediate notification of any moves by asset managers to prevent investors from accessing their money by suspending fund trading or imposing redemption gates.
A senior London-based portfolio manager said he received an unexpected letter from the central bank asking about liquidity management practices following two large redemption orders.
“The redemptions were just normal business for us as an institutionally focused shop and we could not understand how the CBI knew about the transactions,” said the manager, who declined to be named. He then contacted his fund administrator who told him it had notified the central bank.
Fund administrators play an essential role in the investment industry’s plumbing by ensuring that customer orders are processed efficiently and securely by an independent third party.
“It is understandable that the regulator wants to be on the front foot but we were not aware that the CBI was conducting this kind of detailed monitoring until speaking with our fund administrator,” said the manager.
More than 7,300 investment funds are domiciled in Ireland, which has developed into a major asset management hub for Europe. Mutual funds domiciled in Ireland for legal and tax reasons can be sold across Europe and in the UK. The Central Bank of Ireland’s role as a regulator is to ensure an orderly market.
“We read this as an exercise by the regulator to assess the liquidity landscape in advance of the original Brexit date [March 29] and the European money-market fund reforms which also went live in late March,” said a fund administrator who declined to be named. “It represents a more frequent review over what was expected to be a volatile period.”
Monica Gogna, a partner with law firm Dechert in London, said enhanced monitoring was not a surprise. “The interesting part will be how this supervision evolves. Too cautious an approach could stifle growth but the CBI will need to focus on supervisory and monitoring activities as the size of Ireland’s fund pie expands,” she said.
Several UK property funds were forced to stop investors from withdrawing their money in the immediate aftermath of Britain’s vote to leave the EU in the summer of 2016. Aviva, Columbia Threadneedle, Henderson, M&G and Standard Life all put up redemption gates that locked up more than half of the £25bn committed to commercial property by UK retail investors. Although the funds were gradually reopened between July and December 2016, the reputation of the managers involved was damaged.
The Financial Conduct Authority responded by undertaking a review of property funds and their liquidity risks. The UK regulator’s initial findings said the suspensions helped limit the escalation of market uncertainty but the managers could have done better with regard to communicating with investors. The FCA’s final judgment has yet to be released.
The Central Bank of Ireland and fund administrators BNY Mellon, Northern Trust, JPMorgan, Brown Brothers Harriman and State Street declined to comment.