FCA hits back at criticism over Woodford

FCA hits back at criticism over Woodford

The Financial Conduct Authority (FCA) has rejected criticism that its chief executive Andrew Bailey has been blase about the suspension of the Woodford Equity Income fund.

In a letter on the issue to the Treasury select committee, Ian Sayers, chief executive of trade body the Association of Investment Companies (AIC), accused Mr Bailey of downplaying the impact of the fund's suspension.

Mr Bailey had told the Treasury select committee on June 25 that a fund suspension should not always be viewed as a negative, as it allows the fund manager to avoid having to conduct a “fire sale” of assets, as that disadvantages investors. 

Mr Bailey was referring to the notion that if a fund manager suspends the fund, he can take his time selling assets to meet future redemptions, and therefore achieve a higher return for investors.

If a fund is not suspended, then the manager may have to sell and take whatever price is offered, which may be detrimental to the returns available to the end investor. 

Mr Bailey also said: “Suspension is a tool that is very clearly set out in the prospectus”. 

But Mr Sayers said this was not the case, arguing many investors would not have been aware of this option. 

Mr Sayers said: “This section [of the prospectus] does not provide any insight into the circumstances when a suspension might arise nor its likelihood. 

"The term ‘suspension’ does not feature in the risk factors identified in the prospectus.

"The 16th detailed warning (out of 21) says 'Unlisted companies are not generally publicly traded. As there may be no open market for a particular security it may be difficult to sell and cause liquidity issues'.  

"A lawyer might argue a technical case that this addresses the issue of suspension, but this somewhat oblique reference cannot be characterised as an accessible disclosure for the non-professional investor.

"The lack of any clearer reference to suspensions in the risk warnings is despite the prospectus being published on 23 July 2018 during (as I understood Mr Bailey’s evidence) a period when the FCA had the fund under an ‘enhanced monitoring’ regime because it had breached its limits on holding illiquid assets. 

"Far more likely to be appreciated by a retail investor is the fund’s redemption policy.

"The first line of the section in the prospectus devoted to redemptions states 'Shares in each fund may be redeemed on any dealing day'."

The prospectus for the Woodford Equity Income fund was 64 pages long, with the warning about suspension being on page 24. 

But a representative of the FCA said: “Ahead of the TSC hearing, Andrew Bailey was fully aware of the facts of the Woodford situation, including having read the prospectus.

"Further, as shown on the contents page of the prospectus, there is a specific section on suspensions. Therefore we do not agree with the AIC’s interpretation.”

At the June hearing Mr Bailey told MPs 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.