Retail investors could have their money separated from institutional funds to better protect individuals following the collapse of Neil Woodford’s investment empire, the head of the financial regulator has said.
Financial Conduct Authority (FCA) chief executive Andrew Bailey said in an interview with The Times that he did not think the mixing of institutional and retail investors in funds “is necessarily a good idea” and the matter will have to be examined “when the dust settles” after the saga.
Woodford’s flagship Equity Income Fund (WEIF) was frozen in June after becoming overwhelmed by investor withdrawals.
The final straw was Kent County Council’s attempt to withdraw £263m of pension investments from the £3.7bn fund, which was unable to meet the redemption request because of the large proportion of illiquid assets in its portfolio.
Bailey said the council’s withdrawal request was “the very proximate cause” of WEIF’s suspension.
“That’s why I raise the question of mixing retail and non-retail. That was a relatively big part of the residual fund. Even if technically you could have liquidated holdings to meet that order, you are not satisfying the collective investment test,” he added.
Bailey said the matter will have to be examined “when the dust settles” after the saga. “It has caused me to think, I don’t think [mixing retail and institutional investors] is necessarily a good idea.”
Speaking to City A.M., AJ Bell’s Ryan Hughes said it would be “entirely possible” to separate the two groups of investors, but that the move would not solve the underlying issue.
“Whether you split institutional investors and retail investors, if you’ve got illiquid underlying assets and you offer daily trading it’s irrelevant,” Hughes said.
In the interview, Bailey defended the FCA’s role in the Woodford scandal, saying: “The suggestion we did nothing was wide of the mark”.
Woodford closed his investment company earlier this month after being fired as head of WEIF by the fund’s administrators, who also announced that the fund would be wound up.
The regulator has been accused of being “asleep at the wheel” ahead of WEIF’s suspension, and there have been calls for retail investors to be given clearer warnings about the risks of investing in funds that could suspend withdrawals.
Bailey said the watchdog undertook an “enhanced liquidity monitoring regime” of Woodford’s funds from February last 2018.
In a speech given in the City last week, Bailey said “part of the criticism” faced by the watchdog “is justified”. “The public needs to receive clear meaningful disclosure on the risks they are taking,” he said.
Responding to Bailey’s speech, Investment Association head Chris Cummings said the organisation wants “to see the investment management industry and the regulator striking the right balance between investment risk and investor protection”.