* BOE's Carney adds to pressure on Woodford fund
* Britain's fund industry backs new type of fund
* Follows liquidity issues at suspended Woodford fund
* Fund manager learnt little about risk from crisis-lawmaker (Recasts, adds Carney, detail from IA conference)
By Simon Jessop and Carolyn Cohn
LONDON, June 26 (Reuters) - Bank of England Governor Mark Carney on Wednesday said illiquid funds that allow savers to take money out at will were "built on a lie", in the latest criticism of British investment guru Neil Woodford's management of his suspended flagship fund.
One of Britain's best-known money managers, Woodford over the years won the trust of thousands of small savers before the fund abruptly barred investors from taking their money out because it could not meet redemption requests.
The suspension of the 3.7 billion pound ($4.7 billion) LF Woodford Equity Income fund on June 3 has shocked Britons given the hundreds of thousands of retail investors left dangling and the rarity of an easily accessible fund being suspended.
It has also prompted questions over whether any rules were flouted and thrown the spotlight on funds that invest in less-liquid assets like unlisted companies while allowing investors to take their money out with ease.
"This is a big deal. You can see something that could be systemic," Carney told lawmakers.
"These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren't liquid. And that leads to an expectation of individuals that it's not that different to having money in a bank."
The use of illiquid assets also drew a sharp rebuke from Nicky Morgan, chair of parliament's Treasury Select Committee, who said it showed the money manager "seems to have learnt little from the financial crisis".
She also pledged to back tighter regulation of 'best buy lists' used by fund supermarkets like Hargreaves Lansdown , which has 300,000 clients exposed to the suspended fund. It had the fund in its best buy list until the day of suspension.
Responding to the pressure, Britain's top fund industry trade body on Wednesday said it backed a new type of fund to allow retail investors to access private assets.
Investment Association Chairman Peter Harrison said the body was speaking to regulators and policymakers about the inclusion of less-liquid assets in daily dealing, or open-ended, funds.
"Today, liquidity is valued, perhaps more highly... and I think end-customers, the really important people, didn't fully understand the nature of gating and the value of that liquidity," he said.
A new Long-Term Asset Fund - which was in the works even before the Woodford fund was suspended - would give savers access to investment in private companies and other illiquid assets but would likely require investors to give longer notice if they want to leave the fund, the association said.
At present there are two ways for a retail investor to access a fund: one is through a so-called 'open-ended' fund like Woodford's, which lets investors get their money back any time. The other is by buying shares in a listed investment company.
However, Ian Sayers, Chief Executive of the Association of Investment Companies, said the IA's plan would not address the fundamental issues raised by the Woodford fund suspension, since asset managers tend to favour open-ended funds for commercial reasons.
Woodford is on the verge of appointing PJT Park Hill, a division of the investment bank PJT Partners Inc, to offload stakes in private companies such as Atom Bank and Oxford Nanopore, a source familiar with the matter told Reuters late on Tuesday.
Woodford has sold nearly 200 million pounds in the fund's UK listed assets to meet the fund's redemption requests, which include a demand from Kent County Council, in southern England, for the return of a 263 million pound investment by its pension fund. The fund suspension will be reviewed on July 1.
Woodford's only listed fund, Woodford Patient Capital Trust , which has heavy investments in unlisted stocks, is trading near record lows but was up 0.15% at 0952 GMT.
$1 = 0.7890 pounds Additional reporting by Muvija M and Kirstin Ridley; writing by Sinead Cruise, Carolyn Cohn, Simon Jessop; Editing by Keith Weir and Deepa Babington