FSA clamps down as it labels the word ‘cash’ in fund names misleading

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

It says “cash” implies that 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 rate environment.

The FSA is also concerned about the criteria governing the types of asset the funds can invest in. (article continues below)

It says in a newsletter: “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.”

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

The statement follows a review of money market funds that was triggered by the revaluation of Standard Life’s Pension Sterling fund in January 2009 which led to it losing 5% of its value. Standard Life was fined £2.45m because of the way the fund was marketed.

Several retail money market funds fell in value during the financial crisis. The Threadneedle UK Money Securities fund closed after losses on asset-backed notes. Over the year to Decem­- ber 22, 2008, it was down 11.7%.