Industry figures have reiterated calls for an urgent independent probe into the Financial Conduct Authority’s (FCA) oversight of open-ended fund liquidity after it came to light the watchdog does not hold a central record of fund suspensions.
A freedom of information (FOI) act request by the Financial Times revealed the regulator is failing to keep tabs on fund suspensions following a year that has seen several high-profile funds shut their doors to investors.
In a report sent to the publication, seen by Portfolio Adviser, the FCA said its internal record systems were not set up to search across the 3,500 investment funds it regulates. It added in order to uncover how often funds suspend, staff would have to carry out manual searches of each fund’s file, which would take between two and five minutes on average.
“This would entail reviewing an extensive amount of information spread among a range of systems and business areas to determine that which falls within the scope of your request,” the FOI response said.
Too expensive to conduct relevant search
The response also said conducting this level of search would exceed the cost limit attributed to FOI requests by the Ministry of Justice in section 12 of the Freedom of Information and Data Protection (Appropriate Limit and Fees) Regulations 2004. For the FCA, the appropriate limit is £450, ie 18 hours at the rate of £25 per person hour.
The response said: “This exercise is made more difficult and time-consuming still by the fact that over the relevant period different departments held the information and that it was held on three different databases. Therefore, to determine what information is responsive to your request among this material would exceed the appropriate cost limit provided by the Act.”
A material impact on hundreds of thousands of retail investors
The revelation comes after a year in which the Woodford Equity Income fund was frozen then wound down due redemptions and illiquidity issues. Another of Woodford’s funds, Income Focus, was also frozen and management was passed to Aberdeen Standard Investments.
In December last year, the M&G Property Portfolio was forced to gate just a month after the FCA published its final rules on liquidity in daily dealing open-ended funds.
In a statement to Portfolio Adviser SCM Direct founder Gina Miller said it was crucial the FCA keeps tabs on the number of fund freezes.
“This has a material impact on hundreds of thousands of retail investors and the frequency of which this occurs is an important indicator of the extent to which firms are successfully or unsuccessfully managing the liquidity of their funds,” she said.
“Can you imagine the public outrage if this was allowed to happen in any other industry – for example, the pharmaceutical industry?”
Similarly, Mark Taber, who has campaigned on behalf of London Capital and Finance mini-bond holders and holders of Aviva preference shares, said: “The FCA should monitor fund freezes as they need to be aware of individual problems and also any increase would be a warning of a more general liquidity problem across a sector of funds of funds generally.”
Gina Miller reiterates calls for independent review of FCA
FCA chief executive and incoming Bank of England governor Andrew Bailey has come in for stinging criticism from those who believe his leadership credentials are tainted by a series of failures as boss of the financial regulator.
Last week the Labour party called for a delay to Bailey’s installation as head of the bank and requested an independent inquiry into the role of the FCA in the Woodford scandal.
Miller reiterated her call for the government to conduct an urgent independent review of the FCA. She said this should be along the lines of the probe into the Financial Reporting Council review completed in December 2018 which culminated in the closure of the “amateurish, sub-standard regulator”.
She added: “As a matter of urgency, there should also be an independent review into the due diligence process of appointing Mr Bailey to replace Mr Carney before the Treasury confirms his appointment.”
Taber said: “The Labour question is valid because while Andrew Bailey is better cut out for the BoE role, what happens if the FCA is found to have failed massively on big issues under his watch after he is appointed BoE governor?”
The FCA launched an investigation into the Woodford Equity Income fund two weeks after its suspension in June 2019. It is also investigating the role of authorised corporate directors with a focus on the commercial conflicts faced by external providers of the oversight service.
