The Financial Conduct Authority has revealed more funds have flouted rules around illiquid holdings suggesting scandals involving Neil Woodford and Gam were not one-offs.
Since June 2017 seven funds have breached the Ucits 10% limit on holding unquoted companies a total of eight times, not including breaches made by Neil Woodford’s defunct Equity Income fund.
The information was obtained via a Freedom of Information Act request made by the Financial Times. The paper said the regulator had initially refused to provide the information but relented when the FT called for an internal review of the decision.
The FCA would not name the funds that had violated the rules.
Number of breaches higher than FCA let on
Half of the breaches were defined as passive, meaning market movements like falling public share prices or rising valuations of private companies had tipped the weighting of unquoted investments above the 10% limit.
But the remaining four were classed as active, resulting from investment decisions made by fund managers.
One manager did not inform the FCA a breach had occurred until 10 months later, despite rules requiring managers to notify the regulator immediately. Managers are generally given six months to fix passive breaches.
The number of breaches in recent years shows it has been harder for funds to comply with EU regulation on liquidity than the regulator has previously let on.
Former FCA boss and incoming Bank of England governor Andrew Bailey described it as a “fairly rare phenomenon” at the time of the Woodford scandal and said only two funds, including Woodford Equity Income, had breached the 10% unquoted limit in the past 12 months.
The FCA refused to name the second fund when approached by Portfolio Adviser for comment but Bailey told the Treasury select committee it was “a very small fund”.
‘Clear, simple rules’ needed
Fundexpert managing director Brian Dennehy said it’s time the FCA introduced “clear, simple rules”.
Managers should inform the FCA within a month of a breach occurring and bring the level of illiquid holdings within the 10% limit in three months, he said.
If the situation has not been fixed in three months, a written formal notice of the breach should be sent to all advisers and investors in the fund and the fund group should be fined £1m or 0.1% of the fund value at the time of the original breach, whichever is higher.
Repeat offenders who breach the limit again within a 12-month period should face a higher fine of 0.2% and if the second breach is not remedied in three months, the fund should be liquidated, Dennehy suggested.
“It’s time for everyone to stop making it up as they go along,” Dennehy said. “Time for some nice clear rules and sanctions.”
