Neil Woodford fund was sailing close to the wind, watchdog says

City regulator tells MPs the investment manager broke spirit of rules before crisis

The embattled investment manager Neil Woodford was “sailing close to the wind” and did not act within the spirit of the rules before blocking investors from pulling their cash from his flagship fund, the head of Britain’s financial watchdog has said.

Andrew Bailey, the chief executive of the Financial Conduct Authority FCA), said that although the renowned stock picker had kept within the rules on the percentage of risky assets that could be held in his Woodford Equity Income Fund, he acted on the wrong side of the spirit of them.

Answering questions from MPs on the Commons Treasury committee, Bailey said Woodford twice breached rules on holding unlisted assets early last year.

Set by the European Union, the rules – undertakings for collectiveinvestment in transferable securities (UCITS) – cap the amount of illiquid assets an investment fund can have at 10%, while the rest must be listed on an approved stock exchange.

“Having had these two breaches … actually they were symptomatic of the fact that they were really sailing close to the wind,” Bailey said.

“They then did something which again is allowed under UCITS but I personally think is the wrong side of the spirit of it. At least they should have discussed it with us. But they can do this.”

Woodford was forced to block investors from withdrawing money from his flagship £3.7bn fund on 3 June, as it racked up losses on stock market bets that turned sour, damaging its performance.

Questions have been raised over whether the City watchdog missed signs that Woodford was in trouble, as the rate of withdrawals from his poorly performing fund gained pace. It was finally suspended when Kent county council asked for the return of £263m.

Bailey denied warning signs had been missed, saying Woodford had followed the EU rules which do not require the FCA to be updated.

Among the problems facing Woodford was the proportion of the unlisted investments in his portfolio. As investors pulled cash, Woodford was forced to sell investments in the fund to repay customers. However, the unlisted assets could not be disposed of as quickly as listed shares, meaning he came close to breaching the 10% UCITS rule.

Woodford listed some illiquid assets on the Guernsey stock exchange, allowing the fund to stay within the limit. Bailey said that although this was allowed, it was “regulatory arbitrage” – a term used in the City to describe firms making use of legal loopholes.

“Listing something on an exchange where trading does not actually happen, as far as I can see, does not actually count as liquidity,” he said.

Bailey said if details of the fund’s position had been disclosed to the City regulator earlier, withdrawals would have been suspended before this month.

The suspension of withdrawals was in the best interests of customers, he said. A review is due to take place next week.

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“It’s a tool that is there to be used. In our view suspension is in the interests of investors at this point,” Bailey said, adding: “The alternative of a fire sale would be contrary to the interest of investors.”

A spokesperson for Woodford said: “On 1 March 2019, we announced our intention to reduce exposure to unquoted and less liquid stocks in the Woodford Equity Income Fund.

“This strategy has continued since the suspension and we are focused on increasing the portfolio’s exposure to FTSE 100 and FTSE 250 stocks to improve the fund’s liquidity.”


Richard Partington

The GuardianTramp

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