The boss of Britain’s financial watchdog has accused managers of Neil Woodford’s suspended fund of “using the rules to the full”, and called for an overhaul of “flawed” EU regulations.
Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), told MPs he believed the Woodford fund was “sailing close to the wind” and potentially using loopholes in European rules.
But in a hearing with the Treasury Select Committee, he said he believed it was also a failure of the EU rules, which should have ensured the issues with the Woodford fund were uncovered sooner.
He said managers of the Woodford Equity Income Fund were “using the rules to the full”.
MPs heard that the fund’s manager Link Fund Solutions and Woodford Investment Management “were not required to tell us” as it was bundling up illiquid unlisted investments and listing them in Guernsey.
“It’s a flaw in the UCITS (Undertakings for Collective Investment in Transferable Securities) rules,” he added.
Mr Bailey – seen as a frontrunner to replace Bank of England governor Mark Carney – added he does not believe the Woodford suspended fund followed the rules for how many tradeable, or liquid, shares it held, due to listing some of his holdings on the Guernsey stock exchange.
He said: “Listing something on an exchange where trading doesn’t happen, as far as I can see, doesn’t actually count as liquidity.”
The fund was suspended on June 5, preventing investors from withdrawing their cash after millions of pounds had previously been taken out following a run of poor results.
Due to many of the investments being made into unlisted companies, selling the shares to repay the cash has proved difficult.
The fund was worth around £10 billion at its peak in 2017, but has now fallen in value to between £3.5 billion and £4 billion.
The FCA has launched an enforcement investigation into the Woodford saga and is concerned over the information the fund was providing to the watchdog.
It is also due to review the suspension of the fund next week under the 28-day deadline.
Nicky Morgan, chair of the Treasury Select Committee, took Mr Bailey to task after saying concerns over potential “regulatory arbitrage” by the fund’s managers were first revealed in an article by Citywire.
She said: “Does anybody at the FCA read the newspapers and listen to what’s going on in the industry?”
Mr Bailey admitted the article triggered the FCA’s interest in the potential regulatory arbitrage, but said he believed the rules should be more “principles-based” to prevent firms hiding behind regulations.
He said: “Had the whole story come out into the full and they hadn’t relied on the rules, I suspect a suspension would have happened sooner, which may have been a better thing … but it would still have been a suspension I suspect.”
Mr Bailey also said fund suspensions should not be “demonised”, stressing it was important they can put them in place to protect investor cash and not be forced into a fire-sale of assets on the cheap.
He reiterated calls for Mr Woodford to forgo his fees on the suspended fund, even though he is “managing the fund more than ever” now.
“As a sign to his investors, it would be a good thing to do. He hasn’t I’m afraid,” he said.