After Woodford fund suspension, focus turns to its stewards
17/06/2019 14:47
* Fund suspension linked to holdings in private firms
* Regulator looking at stocks moved to Guernsey
* FCA says move legal, possible breach of spirit of the law
By Simon Jessop, Carolyn Cohn and Huw Jones
LONDON, June 17 (Reuters) - The suspension of Neil
Woodford's flagship fund has put the focus on a little known
firm tasked with ensuring his investors were being looked after
properly.
While Woodford, one of Britain's highest profile money
managers, picked the companies in which the LF Woodford Equity
Income Fund invested, the fund's governance was overseen by a
company with a much lower profile -- Link Fund Solutions.
Link acts as Woodford's Authorised Corporate Director (ACD)
and is the fund's legal owner. In the prospectus for the
suspended fund, Link lists a group of six directors led by its
Chief Executive, Christopher Addenbrooke.
ACDs are meant to ensure fund managers stick to their
investment mandates and follow the rules. They usually attract
little scrutiny, but Woodford's fall from grace has raised
questions about whether they are fit for purpose.
One key question is whether ACDs -- hired by the investment
manager -- challenge fund managers' decisions robustly enough.
"The ACD's role is very much behind the scenes from most
retail investors' perspective, but is nonetheless crucial - they
play a major part in ensuring that the fund complies with the
FCA's rules," said Richard Small, a financial services partner
at Addleshaw Goddard.
Britain's regulator, the Financial Conduct Authority (FCA),
has said it was looking into the circumstances surrounding
Woodford's fund suspension and the listing of some of its assets
on an exchange in offshore dependency Guernsey - a move Link
would have needed to approve.
"I would expect that the FCA will take a hard look at Link's
role in this affair," Small said.
"They will be asking themselves whether this is another case
of firms taking an overly technical tick-box approach to
regulation without proper regard for the spirit and intention of
the rules."
LIQUIDITY QUESTION
Link, which works with almost 7,000 clients, suspended the
3.7 billion pound ($4.7 billion) fund two weeks ago as it
struggled to meet redemption requests, in part because of its
large holdings in private companies.
Under particular scrutiny are stakes in four firms listed on
The International Stock Exchange (TISE) in Guernsey, which
helped Woodford meet rules capping the proportion of unlisted
holdings in his portfolio at 10%.
The listing of BenevolentAI, Ombu, Industrial Heat and
Sabina Estates helped the fund to comply with the cap. However,
none of those shares have ever traded, the TISE website shows.
"The decision to reduce exposure to unquoted assets while
indirectly maintaining exposure through a listed vehicle was in
line with the investment objectives and strategy of the fund," a
Link spokesman told Reuters.
But FCA chief Andrew Bailey said while the Guernsey listings
were permissible under the rules, "I don't think it is right",
suggesting it may focus on breaches of the spirit of the law.
The FCA said on June 5 it has been in discussion with Link
and TISE regarding the Guernsey listings.
The ACD must follow the FCA's 'COLL' rules for investment
funds. Under them, Link had the power to designate Guernsey as
being a suitable market, but only as long as it met conditions
including that it was "adequately liquid".
The watchdog is expected to scrutinise why Link deemed
Guernsey a suitable venue to ensure that assets could find a
ready buyer if Woodford needed cash to meet redemption requests.
The FCA declined further comment.
Alan Hughes, partner at law firm Foot Anstey, said:
"Something may be strictly within the rules but is it in the
best interests of the investors?.. the fund itself and the ACD
may have a broader duty to consider."
REFORM CALLS
The Woodford suspension has prompted calls for a reform of
the industry.
"The model is broken because of the conflict of interest,"
said Matthew Priestley, head of Investment Management Oversight
at Fund Partners, itself an ACD.
A better way, he said, would be for the FCA to ringfence
some of the fees it gets from the industry to pay for ACDs out
of a "blind pot".
The Woodford suspension is the third time in recent years
that Link, and its former incarnation as Capita Financial
Managers (CFM), part of outsourcer Capita CAP.L , has drawn
regulatory attention.
In 2012 CFM was censured for breaches of principles related
to diligence, management and control in the collapse of two Arch
Cru funds. It paid 32 million pounds towards a 54 million pound
compensation scheme for investors, without admission of
liability.
The Arch Cru funds were invested in Guernsey cell companies
which listed on the Channel Islands Stock Exchange. The cell
companies invested in a range of unlisted assets, including
hedge funds and fine wine.
One criticism of CFM was that it did not adequately monitor
liquidity. Around 6,400 investors lost nearly 400 million pounds
($500 million) after the funds were wound up in 2010.
CFM was censured again in 2017 for a lack of due diligence
on the Connaught Income Fund which liquidated in 2012. Investor
losses were around 110 million pounds, although Capita paid up
to 66 million pounds in compensation.
($1 = 0.7910 pounds)
(Editing by Keith Weir)
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