UK regulator opens formal investigation into Woodford meltdown
FCA said fund manager had twice breached a liquidity limit in 2018
The UK financial watchdog has opened a formal investigation into the freezing of Neil Woodford’s flagship fund and admitted that the star stockpicker twice breached a key liquidity limit.
Andrew Bailey, chief executive of the Financial Conduct Authority, said the regulator had notified Woodford Investment Management of an enforcement investigation, which could lead to bans and fines if wrongdoing is found.
Mr Bailey revealed in a letter to the Treasury select committee, which was published on Tuesday, that Mr Woodford had exceeded a 10 per cent regulatory cap on unlisted securities in February and March last year, some 16 months before his Equity Income Fund blocked withdrawals after being swamped by redemption requests.
Mr Woodford has long insisted publicly that the suspended fund had not breached the limit. In a statement on Tuesday, his fund management group said: “Woodford always provided month-end data for investors and at no time was there a month-end passive breach. The FCA reference to breaches in February and March 2018 relates to two inadvertent intra-month passive breaches, both resolved before month-end.”
The letter from Mr Bailey showed that the regulator had concerns for months about Mr Woodford’s increasingly dire liquidity position, looking into the issue as early as February last year, raising serious questions over whether it could have done more to prevent the fund’s meltdown.
The select committee has been scrutinising the regulator’s actions surrounding the Woodford fund suspension, which trapped £3.7bn of investors’ money this month.
Mr Bailey, seen as a leading contender to replace Mark Carney as the next Bank of England governor, said the FCA was also investigating Link Fund Solutions, which oversaw the running of the fund.
He said the FCA had held “monthly monitoring discussions” with Link in relation to a “deteriorating liquidity position” between April 2018 and December 2018.
According to Mr Bailey, by mid-2018 about a quarter of the fund was invested in stocks that would take between 180 and 360 days or more to liquidate. By April 2019 the proportion of those stocks had risen to 33 per cent while 32 per cent of the portfolio would take between 20 and 180 days to liquidate, Link estimated.
Woodford Investment Management said: “We can confirm we have been contacted by the FCA, regarding its investigation relating to the events that led to the suspension of the LF Woodford Equity Income Fund, and will be co-operating fully with its investigation.”
Link also confirmed the FCA had opened an investigation into its own role in the fund’s suspension and that it would co-operate with the regulator, adding that it had “at all times acted in accordance with applicable rules”.
In the letter Mr Bailey called for a wider exploration of whether changes needed to be made to EU fund rules, known as Ucits, which enabled Mr Woodford to deal with the cap on unlisted stocks by listing three stakes on the Guernsey stock exchange.
According to people briefed on the FCA investigation, it is this manoeuvre that has particularly drawn the attention of regulators.
“Our preliminary supervisory inquiries suggest that the exposure to unlisted securities within the fund was around 20 per cent of the [net asset value] in February 2019 prior to the [Guernsey] listing,” Mr Bailey’s letter revealed.
Mr Bailey, who will face questioning on the Woodford debacle by the select committee next week, responded to calls for the manager to waive his management fees while the fund was gated, saying such a move would be “a gesture of support to investors”. He added, however, that such decisions were “for the fund manager to take”.
Nicky Morgan, the Conservative MP who chairs the select committee, said: “I am grateful to Mr Bailey and the FCA for responding to my letter in good time, and note that the FCA has opened an investigation into the events that led to the suspension of the Woodford Fund.”
Philip Warland, an investment industry veteran who advises UK fund boards, said the FCA regulation was inadequate: “The letter reflects the fact that the FCA is bereft of understanding of asset and fund management at the operational level.”