InvestmentsJun 10 2019

Morgan pressures FCA over Woodford

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Morgan pressures FCA over Woodford

Nicky Morgan has written to the Financial Conduct Authority (FCA) to enquire whether Woodford Investment Management should forgo its management fee while investors remain locked out of its equity income fund.

The fund was suspended 3 June due to the wave of redemptions from investors seeking to withdraw their cash, following a period of underperformance.

The suspension will run for a minimum of 28 days from Monday, but can be renewed.

Ms Morgan, who chairs the Treasury select committee, asked Andrew Bailey, chief executive of the regulator, whether fund houses that suspend redemptions should be allowed to continue to charge a management fee.

This comes after platform Hargreaves Lansdown called on Woodford to drop his fee after it itself dropped the platform fee for clients invested in the fund.

Woodford Investment Management insist the fee has remained unchanged during the period of the suspension, with the fund manager working every day to sell assets in order to raise enough cash to meet demands from investors who wish to redeem their holding.

Ms Morgan wrote: "The suspension of trading has provided Mr Woodford with some breathing room to fix his fund; he should afford his investors the same space and waive the fund’s fees while the fund is suspended."

The MP for Loughborough asked five further questions she wishes Mr Bailey to answer ahead of his appearance before the committee on June 25.

These are what factors should dictate how long a suspension should be, and whether there was a maximum length;  at what point the FCA would intervene in a suspension; whether the FCA had a view on the fees that funds charge during a suspension; and whether the FCA has initiated any formal investigation related to the events that led to the suspension.

Ms Morgan also asked for a timeline of the FCA’s supervisory contact with the fund or management; and a timeline of the FCA’s supervisory contact with the authorities in Guernsey, in relation to the fund.

The regulator has previously issued a statement reflecting on the fund's suspension in which it said it had been notified of the decision to suspend the fund but it does not approve suspensions.  

It also said a suspension was "not an outcome the FCA seeks to avoid if it is in the best interest of fund investors" and that they are recognised as a legitimate tool internationally.

However, there was some controversy over the FCA's account of the fund's Guernsey listing.

The International Stock Exchange, which operates the market in Guernsey, contradicted claims made by the FCA when it said it had not been informed of Neil Woodford's decision to list some of his unquoted holdings on the island to ensure he met Uctis rules.

TISE stated it made several attempts to contact the FCA back in April 2019 but with no initial response, finally securing a call with them on May 8 2019. 

Mr Woodford had listed some if his unquoted holdings on the Guernsey Stock Exchange, which meant they counted as quoted holdings for regulatory purposes though weren't very liquid. 

Woodford Equity Income held substantial holdings in unquoted companies and, as cash fled the fund, the manager was forced to sell assets to raise funds.

But because no UK open-ended fund can have more than 10 per cent in unquoted companies and as Mr Woodford was selling quoted holdings to meet redemptions, the proportion of unquoted holdings was rising to a level that would breach regulatory limits.

Responding to Ms Morgan’s letter, a Woodford representative said: "Woodford contributed to the FCA’s recent paper on patient capital and authorised funds.

"As announced on 1 March 2019, our long-term intention is to not have any exposure to unquoted holdings in WEIF [Woodford Equity Income Fund].

"Moving the exposure to the asset class via a collective vehicle rather than individual unquoted stocks makes sense and is in the interests of investors. This process is already underway and will decline over the remainder of this year."

The comment comes in the wake of Woodford Investment Management announcing that it will no longer publish its full list of the investments, and will instead simply publish the top ten largest holdings.

The practice of publishing the top ten is very common throughout the industry, as it is far rarer to publish all of the holdings.

In an article written for our sister publication the Financial Times, Mr Bailey said one of the questions raised by the suspension is whether open-ended funds should ever be allowed to own unquoted investments.

david.thorpe@ft.com