Flawed rules and failures in communication allowed a series of problems at Neil Woodford’s beleaguered £3.7bn investment fund to go unaddressed for weeks, MPs heard on Tuesday.
Mr Woodford’s flagship fund has suffered huge cash outflows and, after struggling to meet redemption demands from investors, suspended withdrawals earlier this month, leaving thousands of customers without access to their savings.
Speaking before the Treasury Select Committee, Andrew Bailey, the head of the Financial Conduct Authority (FCA), pointed the finger at a loophole in regulation that enabled the fund to exceed the threshold for investment into illiquid company shares: by disclosing the proportion of previously private companies that were now listed but failing to mention they were listed on the Guernsey stock exchange and rarely, if ever, traded.
“It’s a flaw in the UCITS [Undertakings for Collective Investment in Transferable Securities] rules,” Mr Bailey said.
He later added: “Listing something on an exchange where trading doesn’t actually happen doesn’t count as liquidity ... I’m still waiting to hear that a trade actually occurred [in the companies that Mr Woodford’s fund recently listed in Guernsey].”
The FCA also did not immediately heed warnings from Guernsey regulators about the listings because a message was given to a junior staff member who did not understand the situation, said Mr Bailey, in a session widely billed as being an “audition” to be the next governor of the Bank of England.
Before problems emerged earlier this month, Woodford Investment Management’s main fund had twice exceeded the 10 per cent cap on the amount of investors’ money that can go into unlisted investments, which are riskier and harder to sell.
Its Equity Income Fund was one of only two out of around 3,000 funds of this type regulated by the FCA that breached the limit in the past year, Mr Bailey told the parliamentary committee.
The first breach took place as far back as November 2017, with the second occurring in February 2018, prompting the FCA to put Woodford’s fund under “enhanced monitoring”.
But the star fund manager attempted to use “regulatory arbitrage” to stay under the 10 per cent limit, a tactic that was not immediately picked up on by the FCA.
In March, Link Fund Solutions, a company that administered Woodford Investment Management’s funds, listed a number of companies held in the fund on the Guernsey stock exchange.
By 11 April, Guernsey regulators suspended the largest of these listings. “We understand they did that because they were concerned it was regulatory arbitrage, which it was,” Mr Bailey said.
Link Fund Solutions was “using the rules to the full”, Mr Bailey told MPs.
Nicky Morgan, chair of the Treasury Select Committee, took Mr Bailey to task, noting that concerns over the listings were first revealed in an article by Citywire on 29 March.
She said: “Does anybody at the FCA read the newspapers and listen to what’s going on in the industry?”
Mr Bailey said the article triggered the FCA’s interest in the potential regulatory arbitrage and argued that, even if the watchdog had acted sooner, the fund would likely still have been suspended.
Mr Bailey, widely rumoured to be in the running to succeed Mark Carney at the Bank of England when he steps down in January 2020, also acknowledged flaws in the FCA’s handling of issues raised by Guernsey’s stock market regulator on 15 April.
“For some reason, between the 15 April and the 26 April after the initial call which went somewhere else in the FCA, they didn’t make contact and they didn’t try again until 26 April,” Mr Bailey said.
“Once they called again on the 26th they got an immediate response from us saying,‘Let’s arrange to talk’.”
However, Mr Bailey said the first “conversation of substance” between UK and Guernsey regulators did not take place until 8 May. The fund was suspended four weeks later.
Link Fund Solutions had also been found by the FCA back in late 2016 to have a conflict of interest in its role for Woodford Investment Management.
Link was the fund’s authorised corporate director but also responsible for providing supposedly independent valuations of its assets.
Mr Bailey said the FCA had assessed the situation and told Link: “We can’t have that. You’ve got to appoint an independent valuer.”
He added: “We had to do the review and say to them that we are not comfortable with this.”
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