The absurdity of an FCA decision to leave funds like Woodford Equity Income out of its recent liquidity rules for open-ended funds has been laid bare as transition managers take over and prepare the wind down of the fund.
Link confirmed on Tuesday Neil Woodford’s £2.9bn fund had been yanked from him with Blackrock responsible for winding up the quoted portfolio while PJT Partners will deal with unquoted positions.
In September, the Financial Conduct Authority failed to include Ucits in its measures to address liquidity risk in retail funds.
Instead the rules were limited to non-Ucits retail schemes despite the fact the FCA had delayed publication of its findings, initially scheduled for June, due to the Woodford Equity Income fund suspension.
FCA rule changes now look more absurd
SCM Direct founder Gina Miller says it was “shameful” the FCA excluded funds like Woodford from its rule changes and that decision now looks even worse.
“The announcement by Woodford today makes the FCA recent rules on liquidity even more absurd than they did when the FCA published them.”
Miller reckons retail investors must be required to sign a waiver stating they understand the risks before investing in a fund with unquoted holdings.
Chelsea Financial Services managing director Darius McDermott also said the FCA rule changes had been a damp squib. “It didn’t take into account the Woodford issue, which was happening while that document was being finalised.”
FCA reluctant to improve on Ucits standards
The FCA would not comment on the criticism its recent liquidity rule changes faced in light of the Woodford wind down.
In August, chief executive Andrew Bailey was reluctant to raise liquidity standards in Ucits pointing to the fact any such rules would not extend to funds domiciled elsewhere in the European Economic Area that is governed by the EU directive.
“So, tightening the liquidity standards for UK funds would not be sufficient to protect UK investors from harm,” Bailey said in a letter to Lord Myners, who had raised questions in July about why the FCA did not implement higher standards for liquidity than the Ucits requirements.
The FCA is currently working with the Bank of England to examine redemption terms on open-ended funds that have a liquidity mismatch with the assets they invest in.
Candid Financial Advice director Justin Modray is disappointed the FCA hasn’t found a way to enforce stricter liquidity rules on Ucits, although he says it is also important rules are “more rigorously enforced by both ACDs and, ultimately, the FCA”.
Bailey has already accused Woodford for “following the letter, but not the spirit” of its rules. In April, Woodford listed a trio of unquoted stocks on the Guernsey Stock Exchange as a means of staying within Ucits rules on unquoted companies.
Treasury committee urged to get involved
Miller says the Treasury select committee needs to investigate the “clear failure by the FCA under Mr Bailey”.
She reckons the FCA needs to urgently ban all funds with daily or weekly dealing that invest in illiquid assets, including funds, like Woodford Equity Income, that hold listed equities that do not regularly trade.
Fund Expert managing director Brian Dennehy also reckons the Treasury select committee should get involved if the FCA is not able to learn from its own mistakes.
The FCA should have been in charge from the beginning given their objectives to deliver an “appropriate degree of protection for consumers” and to protect and enhance the integrity of the UK financial system, Dennehy says. “In this regard I believe that they failed.”
Dennehy says a small group of practitioners and interested parties, even including journalists like Jeff Prestridge and Paul Lewis, should be given powers to review and report on the debacle.
Catherine McKinnell MP, interim chair of the Treasury committee, said in a statement: “There is still some time to go in this uncomfortable episode, which has raised important questions about the functioning of the funds industry. I’m sure the Committee will want to examine what lessons can be learned from this saga.”
