The Financial Conduct Authority chief executive has floated the idea of separating retail investors from institutional funds in the wake of Woodford Investment Management’s collapse.
Speaking to UK newspaper The Times, Andrew Bailey said the implosion of Woodford’s fund empire had led him to think whether mixing the two types of investor is a good idea because “having a redemption period that doesn’t match the liquidity of the assets is odd to dangerous”.
The Woodford Equity Income fund was suspended by its administrator Link Fund Solutions in June after the Kent County Council pension fund sought to withdraw its £263m investment. Bailey said Kent council’s request was “the very proximate cause” of the freezing of the Equity Income fund.
He said: “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.”
Link pulled Woodford from the Equity Income mandate earlier this month and the fund is being wound down. Woodford’s other open-ended fund, Income Focus, was also frozen as he stood down as its manager and he was also booted from his closed-ended vehicle Patient Capital Trust, with the board handing the mandate to Schroders.
Bailey told The Times the matter will have to be looked at “when the dust settles” over Woodford.
“It has caused me to think, I don’t think [mixing retail and institutional investors] is necessarily a good idea,” he said.
‘Hardly democratisation of investment’
But Gbi2 managing director Graham Bentley said there are already checks in place that should have covered off the illiquidity issue without having separate funds for larger blocks of money.
These include swing pricing, staying within the 10% unquoted limit, and identifying a target market for the fund, as required under Mifid II.
“But you could also require funds to publish their exposure to the, say, top five largest single investors/nominees and their illiquidity buckets, etc,” said Bentley.
“Having separate funds for professional investors is already with us through qualifying investor funds, etc. Denying access to certain funds simply because you have less money than ‘the big boys’ is hardly democratisation of investment is it?”
The FCA recently announced measures to address illiquidity in open-ended funds which controversially do not apply to Uctis such as Woodford’s Equity Income.
The Investment Association previously touted the idea of long-term asset funds that aim to address liquidity crunches by only allowing investors access to their money at certain points. The proposals were met at the time with a lukewarm response.
Bailey also denied the regulator had acted inappropriately over the Woodford saga, saying “the suggestion we did nothing was wide of the mark”.
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