Tuesday 25 June 2019 11:53 am

FCA chief Andrew Bailey says Woodford debacle a failure of rules not regulation

Andrew Bailey, the head of Britain’s Financial Conduct Authority (FCA), said the dramatic suspension of Neil Woodford’s flagship fund was due to a failure of rules rather than of regulation.

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Speaking in front of the Treasury Committee, Bailey said that Woodford was “using the rules to the full” and that they need changing.

Bailey’s grilling by MPs was trailed in the media as an audition for the role of Bank of England governor. The FCA chief executive is the bookies’ favourite to replace Mark Carney in January.

The fund of star investor Woodford was frozen this month with £3.7bn of investors’ money locked inside. In 2017 the Woodford Equity Income fund was worth about £10bn, Conservative MP Charlie Elphicke pointed out during today’s hearing.

Bailey said the European Union’s “excessively rules-based” Ucits directive, which covers equity fund management, has been partly to blame for the Woodford debacle.

“It doesn’t have, in my view, a sufficient element of principle in it,” he said.

Woodford was following the rules but pushing the directive’s 10 per cent limit on illiquid assets, Bailey said. 

He also designated a portion of unlisted holdings in the fund as listed, based on an intention to list in Guernsey, Bailey said, which is within the rules.

But Bailey said: “Listing on an exchange where trading doesn’t happen, as far as I can see… does not actually count as liquidity.”

These issues “demonstrate the problems you get with an excessively rule-based system,” the FCA boss said. “It doesn’t have, in my view, a sufficient element of principle in it.”

Bailey also said it was right to suspend the fund to protect people’s money. But he said the decision could have been taken sooner if the UK adhered to a system based on “principles” rather than “box-ticking”.

He agreed with Elphicke’s suggestion that “you can’t regulate a bad investor”.

Read more: Financial Conduct Authority launches probe into Woodford fund suspension

Bailey said: “Some of the commentary on this indicate that somehow we as the regulator should be more intrusive in terms of how people pick stocks. I think that would be a very bad outcome.”