FCA criticised for mulling retail assets ringfence

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FCA criticised for mulling retail assets ringfence

Industry experts have criticised the regulator's idea to separate retail and institutional investors in funds in the aftermath of the Woodford debacle.

In an interview with The Times, Financial Conduct Authority boss Andrew Bailey said the suspension and winding down of Neil Woodford’s Equity Income fund had made him consider whether mixing retail and institutional investors was “necessarily a good idea”.

His comments came after Kent County Council’s decision to pull all of the £260m it had invested in Mr Woodford’s flagship fund through its workplace pension triggered the fund's suspension on June 3.

The fund had been running with outflows of £9m per working day in May but Mr Woodford's representatives had played down fears about the fund's liquidity, saying outflows had become moderate and that the fund manager remained as confident as ever his strategy would pay off.

But when Kent County Council’s request arrived the fund did not have enough liquidity to meet the redemptions and was suspended. This eventually led to the administrators' decision to wind down the fund and consumers are expected to lose between 30 and 70 per cent of their investment.

Mr Bailey told the newspaper the council’s request was “the very proximate cause” of the freezing of the fund, noting Kent’s institutional investment was a “relatively big part” of the amount Woodford was managing.

He said the City-watchdog would look into the separation of retail and institutional investors in order to provide further protection for retail investors once the dust had settled over the Woodford saga.

But experts have warned the move could backfire and result in reduced options and higher costs for consumers looking to invest their assets, as retail investors often benefitted from the large volume of assets brought to the fund by institutional or professional investors.

Jason Hollands, managing director of communications at Tilney, said: “While there is some logic to this from the perspective of reducing the potential exposure of smaller investors to adverse outcomes from large fund flows — a relatively rare occurrence in my view — the benefits would be hugely outweighed by the negatives.

“Such a move would vastly reduce the range of strategies that retail investors are able to access and would likely lead to much smaller retail funds with higher costs than at present.”

Chief executive and founder of Netwealth, Charlotte Ransom, agreed, adding that what mattered most was ensuring funds were properly structured and regulated, with full transparency on the underlying assets, their liquidity and associated risks.

Meanwhile Tom Sparke, investment manager at GDIM, thought it would be very difficult to draw a line between institutional and retail asset flows.

For example, if the regulator were to include discretionary fund managers and wealth managers in the ‘retail’ sector, funds would still suffer big withdrawals from time to time, such as in the 2016 property fund suspensions which were prompted by wealth managers withdrawing money.

If DFMs and wealth managers were included in the ‘institutional’ bracket, however, this would not change the situation for all the retail clients who invest via advisers and DFMs.

Andrew Hardy, portfolio manager at MGIM, agreed, adding the FCA’s suggestion “entirely missed the point”.

He said: “Separating retail and institutional investors may have helped somewhat in hindsight, but considered on an industry-wide basis, such a change may cause more problems than it solves. 

“Furthermore, the lines are often blurred between institutional and retail investors, which would make such separation hard to implement in practice.”

This was not the first time the FCA has floated the idea of separating retail and institutional investors’ money.

The regulator proposed the split in February 2017 following the aftermath of the 2016 EU referendum when a raft of property funds suspended redemptions.

At the time it suggested to either prevent retail and institutional investors’ monies being in the same fund or segregating the two sectors at a share class level.

Since the Equity Income fund's suspension Mr Woodford has walked from his remaining two investment vehicles and taken the decision to close Woodford Investment Management. FTAdviser took a look at the moment things turned sour for the former-star fund manager.

The FCA declined to comment.


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