Investors should be given clearer warnings about the risks of investing in funds that could suspend withdrawals, industry professionals have said.
Neil Woodford’s equity income fund suspended trading in June after becoming overwhelmed by withdrawals, but it has been suggested that investors may not have understood that the fund could be suspended, leaving them unable to withdraw their cash.
Ian Sayers, head of the Association of Investment Companies (AIC), has challenged statements made by the head of the financial watchdog, Andrew Bailey, about warnings given to investors in the fund.
In evidence given to the Treasury committee, Bailey, who leads the Financial Conduct Authority (FCA) said: “suspension is a tool that is very clearly set out in the [equity income fund] prospectus”.
In a letter sent to then-head of the committee, Nicky Morgan, Sayers said that the “implication” of Bailey’s statement is that “he considered this to be fair warning”. “I disagree with this suggestion,” he added.
In the letter, which was sent earlier in the month but has only just been released, Sayers said that the section of the prospectus for the equity income fund dealing with suspensions “does not provide any insight into the circumstances when a suspension might arise nor its likelihood.” He added: “The term ‘suspension’ does not feature in the risk factors identified in the prospectus.”
Speaking to City A.M. about the letter, Sayers said: “there are huge limits on the extent to which you can use disclosure as a way of either informing or indeed protecting consumers”, and estimated that only a “vanishingly small” number of retail investors were likely to have read the prospectus.
However, Ryan Hughes, an AJ Bell analyst, said that it was standard practice for suspension not to be included in the risk factors of a prospectus.
Hughes said he agreed with Bailey’s assessment that the possibility of suspension was “clearly set out in the prospectus, but added: “ the wording of the prospectus and of the documents that surround funds and investments can be clearer and can be written in a way that’s far easier for the consumer to understand.”
“People haven’t understood that when you invest in illiquid assets, there’s a consequence that daily trading might not apply,” he continued. “That’s always been the case and will always be the case, so it’s absolutely key that that gets flagged with investors as clearly as possible.”
Responding to Sayers’ letter, a spokesperson for the FCA said: “Ahead of the [Treasury committee] hearing, Andrew Bailey was fully aware of the facts of the Woodford situation, including having read the prospectus. Further, as shown on the contents page of the prospectus, there is a specific section on suspensions. Therefore we do not agree with the AIC’s interpretation.”