The Financial Conduct Authority (FCA) is eyeing stricter rules around illiquid holdings in open-ended funds as the City watchdog reflects on the lessons learned from the suspension of Neil Woodford’s fund.
The FCA’s boss, Andrew Bailey, said on 11 June during an interview with BBC Radio 4’s Today programme he did not think it was right for Woodford to list nearly 11% of his fund’s illiquid assets in a jurisdiction outside the UK even though that was allowable under the rules.
“I think investors should be able to determine where their assets are held,” he said.
Bailey also told the programme: “[Woodford’s] job now is to get this fund back into a position where there can be orderly trading, so he has his work cut out now.
“The worst thing, in my view, for investors would be if there had to be a disorderly fire sale of assets, which of course would destroy value for them, so in our view, suspension is what we regard as a sensible safety valve.”
All options on the table
In a letter to the Financial Times over the weekend, Bailey also said that banning daily withdrawals from funds holding assets that are difficult to trade and forcing funds to keep assets in jurisdictions chosen by investors were among the options on the table, as the regulator looks to finalise rules for open-ended funds investing in illiquid assets like property.
Woodford’s £3.7bn fund was forced to suspend dealing last Monday as it was unable to cope with a spike in redemptions.
Bailey said the inability of Woodford’s flagship fund to meet investor withdrawals raised questions as to whether the rules around liquidity are working as they should be. Currently the regulator has a 10% hard limit for unquoted stocks in Ucits products.
Additionally, the former City minister Paul Myners, criticised the FCA’s “late intervention”.
Regulation under way
Prior to the Woodford episode, the FCA was in the process of rolling out regulation for Oeics that hold illiquid assets, like commercial property and infrastructure funds, that would require them to suspend trading when there is “material uncertainty” about the valuation of more than 20% of their assets.
He said the regulator would take into accounts the lessons learned from the Woodford meltdown when finalising its consultation.
“The Woodford fund points to a potential problem with the limits on illiquid assets: the purpose of these limits is to ensure that the fund remains liquid. Simply listing an unquoted company overseas does not in itself make the stock liquid. I am a strong supporter of internationally open markets. But investors have a right to choose the jurisdiction in which they invest and for it to be maintained,” he wrote in the FT.
“It is not sensible to provide for daily dealing and redemption in open-ended funds that hold a large exposure to illiquid assets, including those that while listed are not regularly traded.”
Bailey on best-buy lists
Bailey also touched on the responsibilities that platform providers like Hargreaves Lansdown have when singling out ‘best-buy’ funds.
“The use of platforms by investors has grown rapidly in recent years,” he said. “It is important that platforms should exercise their responsibilities thoroughly and in a timely fashion.”
Bailey did not specify whether this was an area the FCA was looking into presently despite calls from many in the industry for the regulator to conduct a review in light of the Woodford crisis.
At the same time the regulator’s boss said he did not want to discourage investment in illiquid securities, which are often issued by start-ups and other firms with “innovative strategies” that are creating jobs and tackling critical issues like climate change.
“Financial markets should support investment in companies that will contribute to economic growth and create jobs. That will foster innovation and help to tackle critical issues such as climate change,” Bailey wrote.
“Securities issued by start-ups and other firms with innovative strategies will often be illiquid, particularly before they begin bringing in revenue, and not all of them will succeed. That is the nature of innovation.
“If we lose sight of this important objective those involved in financial markets will inevitably face criticism that they are too focused on the short-term and are failing to support the economy.”
The FCA top figures are also set to give evidence to the UK treasury select committee, regarding the events that led to the Woodford crisis, on 25 June 2019.
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