The Financial Conduct Authority has defended its role in the Woodford suspension saga at a Treasury Select Committee hearing.
FCA chief executive Andrew Bailey rejected the idea that it had been slow to act in the events leading up to the suspension of Woodford Equity Income in early June. He said the suspension was probably the best outcome for small investors in the fund and insisted that it is not the regulator’s role to “intrude” in the stock choices of fund managers. However, the FCA boss reiterated his belief that Woodford should have waived his fees, a view he expressed a week after the fund was suspended.
Committee chair Nicky Morgan asked why, when Hargreaves Lansdown had flagged concerns over the Woodford fund in November 2017, had the FCA not been in touch with Link, the fund’s authorised corporate director, until February 2018?
Bailey said that the breach of the 10% fund limit in unquoted stocks in February 2018 had triggered an “enhanced monitoring regime” from the FCA, adding that the regulator had been in touch with Link – its main point of contact rather than Woodford Investment Management – before that date.
Outflows Were Manageable
Bailey said the fund’s outflows - equivalent to 1% of its assets a week - were not dramatic enough to cause alarm at the regulator, and that the outflows looked “manageable” until just before the fund was suspended.
Why hadn’t the FCA noted the growing media interest in the fund's listings, especially in relation to the now controversial Guernsey listing of shares, asked Morgan. “Does anyone in the FCA actually read the newspapers and listen to what's going on in the industry?”
Bailey said that stories in the media had triggered further conversations with Link and put the fund's liquidity on the regulator's radar, but that Link was not obliged to tell the FCA about the Guernsey listings.
Asked if the FCA should be more proactive, Bailey said: [Link and Woodford] were using the rules to the full and they were not telling us they were doing that." He added that a more "open conversation" between the regulator and the fund's managers would have led to problems coming to light sooner. Bailey's "best guess" is that this would have led to the fund being suspended earlier.
Was Fund Suspension Right?
The FCA chief executive stuck by his comments, which he made a week after the fund was suspended, that suspension was the right thing for Woodford to do: "It's a collective investment scheme so it has to act in the best interests of the investors."
"Suspension is in the interests of investors at this point", Bailey added, pointing out that a fire sale assets would have been a lot worse and that if the Kent County Council £250 million redemption had gone through - the council had put its stake under review before the fund was suspended - that would have tilted the balance against private investors.
Dover MP and Treasury committee member Charlie Elphicke asked Bailey whether the fund was a "dog", afflicted by poor investment decisions on the behalf of the manager. "Clearly there has been very poor performance over the last two years," Bailey said.
Elphicke asked whether it was possible to regulator for bad investment decisions, but Bailey challenged the idea that Woodford was a bad investor. "Sometimes he wins and sometimes he loses," Bailey said, adding that the manager - as Hargreaves Lansdown pointed out in its defence of the fund remaining in the Wealth 50 Best Buy list - had endured periods of long underperformance before.
Bailey also made the point that it is not the regulator's job to be "more intrusive" in how managers pick stocks, saying that this would be against the interests of investors. It also against the ethos of the regulator, that private individuals should take more responsibility for their savings and investments. "The regulator should not be involved in stock picking," Bailey said.
