FCA will not investigate its role in Woodford saga

The FCA confirmed to FTAdviser on Friday (October 18) it would not commission an independent review into its actions in the lead up to the closure of Woodford Investment Management despite industry figures accusing it of having been "asleep at the wheel".

Consumers are expected to lose large sums of money from the saga which gathered pace after Woodford's flagship fund was suspended on June 3, triggering a series of unfortunate events which led to the firm’s eventual closure.

Some have since argued there had been a number of “red flags” missed by the regulator in the lead up to the events.

Former pensions minister Ros Altmann said the regulator “seems to have been asleep at the wheel” and pointed to the level of unlisted holdings in the fund.

According to FCA rules, unlisted securities can only make up a maximum of 10 per cent in open-ended funds but in February and March 2018 Woodford Equity Income breached this limit twice.

The regulator had been aware of this and arranged monthly meetings with the fund’s administrators, Link, to discuss the liquidity position of the fund.

But a letter from the FCA to the Treasury select committee showed the regulator was aware Woodford’s fund had become even more illiquid by April 2019 when compared with the year before.

Link broke down the portfolio of the fund into four liquidity buckets. Bucket 1 was the most easily sellable assets (expected to be able to be sold between 1 - 7 days), bucket 2 was 8 - 30 days, bucket 3 was 20 - 180 days and bucket 4 was 180 - 360+ days.

In June 2018, 21 per cent of the fund was in bucket 1, so easily sellable, but by April 2019 this had fallen to just 8 per cent.

Meanwhile bucket 4, which was expected to take up to a year to sell, had grown from 25 per cent to 33 per cent.

As at June 30, 2018 the liquidity of Woodford’s Equity Income fund was as seen in the following graph (by %):

By April 30, 2019 the fund had become more illiquid, as illustrated below:

On top of this the City-watchdog had apparently not been aware the former-star fund manager had listed some of his unquoted holdings on the Guernsey Stock Exchange — which counted as liquid for regulatory purposes — in order to address the issue in April 2018.

If you can’t trust a retail fund that’s meant to be well managed and regulated then there’s an impact on the whole industryBaroness Altmann

In fact the FCA was only made aware Mr Woodford had bypassed the liquidity rules in this way when media reports covered the fact such holdings had been listed offshore.

In a letter to the Treasury select committee on June 18, 2019, FCA boss Andrew Bailey said although Woodford’s actions were in line with the regulator’s own rules they had underlined that just because securities were listed on an eligible market it did not mean those specific securities were liquid.

Baroness Altmann said: “Rather than challenging the manager, the regulator seems to have allowed unquoted holdings to be moved into an offshore ‘quoted’ vehicle, thus masking the risks that had been building for investors.

“This obvious red flag should have immediately generated regulatory intervention.”

Baroness Altmann went on to say she thought it would be a “very good idea” for the regulator to investigate its own role in the affair as it was “clear” there had been a failure of “significant proportion”.

She said: “The FCA needs to investigate what happened because we need to reassure the public that consumers will be looked after. We need to learn lessons from this.

“I think this could affect the whole of financial services as confidence in it and confidence in active managers slips.

“If you can’t trust a retail fund that’s meant to be well managed and regulated then there’s an impact on the whole industry.”

Paul Stocks, financial services director at Dobson and Hodge, thought there was “clearly an issue”.

He said: “The FCA needs to consider whether rules and regulations are sufficiently tight in respect of how funds and their managers can operate – in this case, the clear issue is both liquidity and what appears to be a potential ‘style drift’.

“If the rules aren’t sufficiently tight then it would appear to me that action is required to address this. If the rules are, however, appropriate then the FCA needs to take whatever enforcement action is necessary given the situation many investors now face.”

An FCA spokesperson said it had clearly set out its role in relation to Woodford in previous letters and evidence to the Treasury select committee and had nothing further to add.

imogen.tew@ft.com

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