It was revealed in early April that Woodford had quietly listed a trio of unquoted stocks, including Industrial Heat and Ombu, on the Guernsey Stock Exchange as a means of staying within the FCA’s rules on unquoted companies. This unorthodox move allowed him to do away with Benevolent AI, which at 4.38% of the portfolio posed the biggest threat to the 10% limit.
Including Oxford Nanopore, technically the fund’s largest unquoted holding at 2.52% but able to be classified as a listed security given the likelihood of an impending IPO, and the three Guernsey stocks, the Equity Income fund’s unquoted holding would have been 18.2% based on his holdings as at 31 March 2019.
The regulator said in a statement on Wednesday that it has been “in discussions” with the International Stock Exchange (TISE) and Links Fund Solution, the Authorised Corporate Director for the fund, about the “circumstances around the listing of certain of the fund’s assets on that exchange”.
It did not discount the possibility of an investigation, signing off the press statement by saying: “Where the FCA believes there are circumstances suggesting serious misconduct or non-compliance with the rules it may open an investigation.”
‘Pure regulatory arbitrage’
While Woodford’s creative methods of offloading his unquoted stocks in the Channel Islands and other less liquid exchanges comply with the FCA’s rules on unquoted companies, commentators have complained they do not adhere to the spirit of the rules as there is no demonstrable liquidity.
Peter Sleep, senior portfolio manager at Seven Investment Management, described the strategy as “pure regulatory arbitrage”.
“Really the ACD and the depository should have spotted that and pushed back. It’s not clear to me that they did.”
The FCA plays no role in the listing decisions of TISE, which falls under the purview of the Guernsey Financial Services Commission.
As such the regulator said it was not informed, nor would it have expected to be notified, of a decision to list the fund’s assets prior to their listing
Where was the FCA?
Dennehy Weller & Co managing director Brian Dennehy said the regulator “needed to be visible” much earlier on given the amount of money that was invested in Woodford’s funds.
“They have a responsibility to maintain confidence in the whole sector and they needed to be involved sooner to show that they were doing that,” he said.
Dennehy said the FCA would have to consult with Hargreaves as well because they have so many clients in the funds.
He thinks Woodford, the regulator and the D2C giant could have come up with a solution earlier instead of waiting and becoming overwhelmed by events. “Now any solution is going to be from a position of weakness.”
FCA speaks out on suspended fund
The regulator also took the opportunity to broach the subject of the suspension of Woodford’s flagship fund.
It said it was contacted by Link and the fund’s depositary Northern Trust Global Services that they had decided to suspend the fund on 3 June after an “increased level of redemptions that the fund was unable to meet immediately”.
The FCA is notified of decisions to suspend funds but does not approve them.
“We expect all firms involved to uphold their obligations to act in the best interests of all investors and to ensure the fund’s assets are sold in an orderly manner,” said the regulator. “A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again.”
Hargreaves also announced on Wednesday that it “will be taking the time to talk” with the FCA, Link and Woodford “to ensure we continue to best serve our clients” and said it would be keeping clients updated “every step of the way”.