Financial Conduct Authority (FCA) boss Andrew Bailey has blasted what he called the "conflict of interest" at the heart of Neil Woodford’s suspended Equity Income fund.
The fund was suspended on June 3 as a result of a sustained period of outflows, with as much as £9m being drained per working day in May.
Giving evidence before the Treasury select committee today (June 25) Mr Bailey said the regulator was forced to intervene in 2016 as it was not comfortable with the practice of Woodford Investment Management hiring the firm that valued the unquoted holding in the funds, rather than outsourcing this.
Duff and Phelps did the valuations, but the view of the regulator was that Woodford should not be hiring the firm, instead the administrator Link should do so.
Mr Bailey said he contacted the fund’s administrator Link and got them to force Woodford to appoint independent, external valuers of the shares in 2016.
A number of the investments in the unquoted portion of the Equity Income fund have performed poorly over the past year.
Mr Bailey said Link bore primary responsibility for FCA compliance, as, from a regulatory point of view, that company was responsible for the fund, and Link was regarded by the FCA as having outsourced the investment management to Woodford Investment Management. Woodford is also a regulated entity.
Many of the companies in the Woodford Equity Income fund that were unquoted were permitted to remain so for a fixed period, if the intention was to float them on a stock exchange later.
As the deadline approached to list the shares, Mr Woodford floated the stakes on the Guernsey stock exchange between October and March. Mr Bailey described the practice as "regulatory arbitrage".
Mr Bailey said that under the existing rules Mr Woodford did not have to inform the regulator he was doing this, and the first the FCA heard about it was via media reports this June.
Mr Bailey said the Guernsey stock exchange contacted the FCA at the start of April to express concerns about Woodford Investment Management’s policy, but the FCA did not respond.
Mr Bailey said: "They contacted a part of the FCA that would not be dealing with this, and contacted someone quite junior, so the message got lost."
The conversation between the regulator and the Guernsey exchange happened in June, after the stock exchange listing of the Woodford holdings had been suspended.
Mr Bailey accepted that the FCA could have done more to intervene, and if it had done so, the likelihood is the fund would have been suspended earlier.
He said: "People act as though suspension is something that should be demonised. But it isn’t like that, suspending the fund is in the interest of all investors, and it is right that it was suspended. We will be involved in the discussions about whether the fund suspension should be lifted next week."