The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, has blamed loopholes in European regulations for the liquidity issues that caused the recent closure of Neil Woodford’s £3.7bn ($4.7bn, €4.1bn) equity income fund.
The fund was frozen on 3 June 2019.
Red flags had been raised about the fund after 21 March 2019, when Woodford’s fund manager, Link Fund Solutions, listed some of the fund’s holdings on Guernsey’s stock exchange – the International Stock Exchange (Tise) – after designating it as an approved exchange.
Allowed by the rules
But Bailey said during an evidence hearing with the UK treasury select committee, that this is allowed under Ucits rules.
“They are not required to tell [the FCA] that they have designated Guernsey as an approved exchange,” Bailey said.
“They have listed some unlisted holdings based on an intention to list [in 2018] – and they can do that.
“They then have a year to list under Ucits rules. My view is that [Guernsey provided the opportunity] because of the [12 month] deadline.”
Guernsey vs FCA
After the main listing happened on 21 March, Tise tried to get in touch with the FCA but nothing came after the first contact.
“The first time [Tise] tried to contact us was on the 15 April, and it’s true that for whatever reason they contacted someone in the FCA who was not at all involved in this area and quite junior, and it must have got lost,” Bailey admitted.
By the time the Guernsey exchange contacted the regulator, it had already suspended Woodford’s listings.
However, according to Bailey, some time between 23 April and 14 May the suspensions were lifted.
“The Guernsey exchange suspended the listings on 11 April,” he added. “Now, as we understand it, they did that – and we’re still waiting to get more details from Tise – because they were concerned it was, to coin the phrase, a ‘regulatory arbitrage’; which it was.
“They contacted us again on 26 April and there was an immediate conversation back. That led to the setting up what I might call a ‘conversation of substance’, which happened on 8 May.
‘Puzzling’ timelines
But, according to Bailey, Tise’s chairman sent a cover letter to Nicky Morgan, chair of the treasury select committee, saying that the first ‘conversation of substance’ did not happen until June.
“I was a bit puzzled there, I have to be honest with you,” Bailey told Morgan during the hearing, “because our understanding is that they told us everything they knew at the time on 8 May.
“Their record of the [8 May] conversation indicates that they said: ‘this is what we know and we’re going do further work on this’.”
And, he added, the conversation in June followed up on the “further work” Tise did on the Guernsey listings.
It is not clear when the cover letter was sent, but according to the information disclosed in it, it is likely to have been written between the phone call that happened in June and the hearing on 25 June.
Admitting fault
However, Morgan tried to press Bailey to understand why the FCA did not engage more with Woodford’s fund and its manager over liquidity concerns, that Bailey said started in early 2018.
“There should have been an open conversation with the fund” he admitted.
