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LONDON, Feb 8 (Reuters) - Britain's financial watchdog has decided against a shake-up of the open-ended funds industry, saying changes such as a ban on holding illiquid assets would increase costs and do little to improve protection of consumers.
The Financial Conduct Authority (FCA) began scrutinising open-ended funds - which can issue or redeem shares at any time - after commercial property funds worth about 18 billion pounds ($23 billion) had to suspend activities in the aftermath of Britain's vote last June to leave the European Union.
The funds ran out of cash when investors who feared property prices would collapse demanded their money, triggering calls for a reform of the sector and for a ban on such funds holding assets like property that can't be quickly converted to cash.
The FCA said in a discussion paper on Wednesday it "would not suggest interventions aiming to restructure the existing regime".
"So, for example, we do not intend to ban open-ended funds holding illiquid assets or prevent retail investors from acquiring units in open-ended property funds," it said.
"We do not believe such changes would advance our financial stability or consumer protection objectives, because of the predictable costs and negative impact they would be likely to cause."
Instead, the watchdog said it was open to ideas on how the "tools" available to fund managers might help them better manage the liquidity of funds that offer regular dealing but hold illiquid assets.
Regulators worry about a so-called liquidity mismatch - or funds making promises of instant redemptions while investing in assets that can take months to sell.
Liquidity mismatches have risen to the top of the agenda for regulators across the world after bond funds came under intense pressure to meet redemptions following big falls in prices during market stress.
$1 = 0.7996 pounds Reporting by Huw Jones; Editing by Mark Potter