Woodford Equity Income being investigated by Financial Conduct Authority

The FCA has confirmed opening an investigation into Woodford's flagship fund. 

Funds and Investment Trusts June 18, 2019 by Tom Bailey

The Financial Conduct Authority (FCA) has confirmed that it has opened an investigation into the Woodford Equity Income fund.

In a letter to the FCA’s boss Andrew Bailey, Treasury Select Committee Chair Nicky Morgan asked whether the regulator “initiated any formal investigation related to the events that led to the suspension of the fund”.

Bailey responded in a letter to Morgan, noting that an investigation had been opened but said he could not comment further.

The suspension of Woodford Equity Income at the start of June attracted the attention of the regulator, with the FCA noting the mismatch in liquidity offered by an open-ended fund like Woodford’s and the nature of its holdings (unlisted, so not easy to sell quickly) is an issue.

Following the fallout, the FCA and other bodies have come under criticism for failing to act sooner.

Of particular concern was why Woodford was able to list some of his private companies on the Guernsey stock exchange to skirt the 10% maximum cap open-ended funds can hold in unlisted companies. With its low trading volumes, stocks on the Guernsey exchange are also considered highly illiquid. Woodford’s decision to do so was in keeping with the EU’s UCITS Directive rules.

In response to Morgan’s questioning, the FCA admitted that the episode had “underlined that just because securities are listed on an eligible market does not mean that those specific securities are liquid”.

The regulator continued: “A case can be made for reviewing UCITs [open ended funds] eligibility rules to take greater account of the depth of the market for the individual securities listed.”

Morgan also asked whether the FCA agreed that Woodford should wave fees for the remainder of the suspension. While noting that the fund might do so as a “gesture of support for investors”, the FCA noted that the fund still has operational costs to cover during the suspension period. Bailey added that “decisions around fee structures are for the fund manager to make”.

Morgan has previously called on Woodford to waive the fund’s fees while it is suspended, while James Anderson, manager of Scottish Mortgage investment trust, also waded in. He said that Woodford’s decision not to waive the fee was “absolutely wrong”.

Anderson also raised concerns that regulators could overreact, preventing retail investors from accessing investment vehicles that invest in private, unlisted equities.

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