The Financial Conduct Authority (FCA) has defended itself against accusations it was ‘asleep at the wheel’ ahead of the collapse of former star fund manager Neil Woodford’s investment empire.
CMC Markets’ chief analyst Michael Hewson told City A.M. he thought the FCA “was probably asleep at the wheel” in the runup to the suspension of Woodford’s flagship Equity Income Fund (WEIF) in June.
The FCA has come under sustained scrutiny from MPs and industry professionals since Woodford’s Equity Income Fund (WEIF) gated after becoming overwhelmed by investor withdrawals. The fund was unable to meet redemption requests because of the large proportion of illiquid assets in its portfolio.
Alan and Gina Miller, founders of investment firm SCM Direct and prominent critics of the FCA, have called for a “root and branch” review of the regulator in light of the suspension.
“The regulator is not fit for purpose and is not protecting investors”, Alan Miller told City A.M.
“The theory of the FCA seems to be that as long as you produce some warning in some document somewhere, that somehow protects investors,” he added. “The retail investor expects the warnings, and it doesn’t actually change their behaviour”.
Gina Miller said the focus needed to be on “retail clients, because those are the ones the FCA should be treating fairly and protecting.”
The FCA hit back at the Millers, telling City A.M. it had disagreed with them “on numerous issues relating to the asset management industry, and our oversight of it, over recent years”.
The watchdog said it had “introduced wide ranging rules to tackle issues in the asset management industry”, and was “carrying out work looking at open ended funds and redemption terms.”
It had said last month that retail investors “were not aware of, or did not appear to understand, the liquidity risk to which they were exposed” when they invested WEIF, and is currently investigating the fund.
Hewson said retail investors should be given greater warning of the risks of investing in funds that offer daily liquidity. “There should be a health warning on an awful lot of these products,” he said, “in the same way that you go into a supermarket and you have to prove how old you are before you buy alcohol or a knife.
Administrator Link announced on Monday that WEIF would be wound up “as soon as possible”, and Woodford sacked as its manager.
The process of selling off listed WEIF holdings has already begun. Stock market filings show that by yesterday evening, large portions of all small cap companies the fund had a substantial stake in had been offloaded in transactions worth hundreds of millions of pounds.
Chase de Vere’s Patrick Connolly told City A.M. that while disposing of the fund’s listed holdings was relatively simple, “with the unquoted stocks and smaller companies, we don’t know how long it’s going to take to sell them”. He said a balance had to be struck between getting investors’ money back as soon as possible and “trying to get a reasonable price” for the assets.”