FSA warns ‘cash’ fund name could be misleading

The Financial Services Authority (FSA) has labelled the use of the word ’cash’ in fund names as “potentially misleading” and unveiled a wide-ranging clampdown on money market funds.

The watchdog says cash implies investors’ capital is secure, but money market funds can slip into negative yields because their annual management charges erode capital, especially in a low interest environment.

It also says it has concerns that there is a lack of criteria around the types of asset the funds are permitted to invest in.

An FSA life insurance newsletter says: “The current low interest rate environment has created negative yields in some funds, causing capital to erode by applying annual management charges. Further concerns were highlighted in relation to the governance and oversight of these funds, with poor monitoring practices and, in some cases, a lack of criteria around permitted underlying investments.” (article continues below)

The FSA says it is contacting relevant firms requesting remedial action.

The statement comes after a review of money market funds which was triggered by the revaluation of Standard Life’s pension sterling fund in January 2009 which saw it lose 5 per cent of its value. Standard Life was fined £2.45m in January 2010 due to the way the fund was marketed.