Writing to former Treasury Select Committee Nicky Morgan on 9 July AIC boss Ian Sayers said he found Bailey’s observation surprising that “suspension is a tool that is very clearly set out in the prospectus” and thus a “fair warning” for investors.
While the Woodford prospectus plays by the rules, Sayers argues that the information around suspensions is scant and far from clear.
“It is true that the Woodford Equity Income Fund prospectus includes a full disclosure of the rules applying where a suspension is required. However, I doubt that this provided any real insight to investors about the risk, if they read the disclosure at all,” he wrote.
The section on suspensions takes up less than a single page of the fund’s 64-page prospectus and does not include information on the circumstances that might trigger a temporary halt on trading nor the likelihood of such an event.
The term ‘suspension’ does not appear in the section on risk factors at the beginning of the prospectus, Sayers added, despite it being published on 23 July 2018 months after the FCA and Woodford’s Equity Income’s authorised corporate director, Link, had begun closely monitoring the fund.
Instead there is a “detailed” yet “oblique” warning about unlisted companies being more difficult to sell and less liquid. “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,” said Sayers.
Similarly there is no reference to the possibility of a suspension in the fund’s Key Information Document nor is it included in the risk section of the Woodford Equity Income factsheet.
“It is surely unreasonable to think that these disclosures provide ordinary investors with any appreciation of the implications of a suspension or how likely such an event might be,” Sayers said. “The regulator should not be relying upon these materials to reduce the consumer risks which have been brought to the fore by this episode.”
Moving forward the AIC has recommended that an authorised fund manager planning to offer an open-ended fund investing in illiquid assets should publish its view on why the structure chosen is in the best interest of consumers.
But it stopped short of calling for banning illiquid assets in open-ended funds altogether.
“There may be situations where these structures are entirely appropriate, for example, where the investors are large institutions and they are fully aware that they may have their rights of redemption suspended for significant periods,” said Sayers.
“It should not create a material cost to AFMs or affect the UK’s international competitiveness. This obligation would be far less commercially intrusive than the current obligation on AFMs to assess ‘value for money’ of funds, a requirement which has a direct impact on the pricing of funds.”