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UK fund industry has had a year to forget — especially the regulator


No one involved in UK asset management can look back at 2019 with any satisfaction as the industry’s most difficult year since the financial crisis draws to a close.

The implosion of Neil Woodford’s investment business and M&G’s decision to bar withdrawals from its UK property fund for a second time in three years are ignominious failures that have cast a shadow across the entire sector.

These debacles could have been avoided. Instead ordinary investors face as-yet-unknown losses. Trust and confidence in the fund industry in the minds of millions of UK savers is severely damaged.

Questions arise repeatedly about the competence of the regulator, the Financial Conduct Authority, in dealing with these problems and its determination to stand up for the interests of ordinary savers.

Investor confidence in the regulator’s competence was further undermined when M&G’s property fund was suspended this month, just weeks after the FCA set out new rules aimed at protecting investors in open-ended funds holding illiquid assets.

We also know now that the FCA was monitoring liquidity problems at Mr Woodford’s flagship Equity Income fund for more than a year but did not communicate its concerns or misgivings to the public.

Contrast this with the attitude of the AMF, the financial regulator in France, which regularly issues blunt warnings about entities it thinks are offering unsuitable products to retail investors.

The FCA also proved toothless when it declined to stop Mr Woodford from continuing to collect fees from investors while his fund was suspended from trading. Fund managers are required to hold enough capital to ensure their businesses can keep the lights on if they run into trouble. Why Mr Woodford was not compelled to use those internal resources, or indeed his own money, to keep his business afloat remains unclear. 

Andrew Bailey, head of the FCA, was quick to blame overly prescriptive European rules that Mr Woodford easily circumvented for some of the problems. Mr Bailey has repeatedly suggested that the UK will be able to adopt a more effective principles-based approach to regulation after Brexit.

But the prospect of the UK diverging from European standards and Brussels using a break in so-called equivalence between the two regulatory frameworks as an excuse to shut the City out of its biggest export market is a nightmare for numerous managers that have built European-operating bases in London.

Another big player in the Woodford debacle is Hargreaves Lansdown, the fund supermarket. Hargreaves’ top executives have failed to provide anything approaching satisfactory answers to questions over the company’s role in aggressively promoting Mr Woodford in its influential “favourite funds” list.

Hargreaves had monthly discussions with Mr Woodford’s team over its concerns about his holdings of illiquid assets, but kept his fund on its best-buy list right up to its suspension.

Close to 300,000 Hargreaves customers were persuaded to invest with Woodford. They face an uncertain wait before learning just how much they have lost.

Mr Bailey has promised that the regulator will re-examine fund buy lists to ensure they are impartial, thorough and up-to-date.

The regulator must take a hard look at the conflicts of interest that arise when fund supermarkets such as Hargreaves can choose funds for their best-buy lists in return for fee discounts that help their business grow, rather than on the basis of performance that benefits an investor.

Any hopes, however, that Mr Bailey’s commitment will result in meaningful reform are diminished by the fact that the FCA effectively handed best-buy lists a clean bill of health earlier this year. 

The Woodford debacle has also exposed other deeply troubling problems in the UK’s fund governance model, most notably involving the previously little-appreciated role of the “authorised corporate director” or ACD, which is supposed to ensure fund managers comply with the rules.

Link’s ability to stand up to Mr Woodford was compromised by the fact that the fund manager set the level of pay for its services as ACD in a clear conflict of interest that exists widely across the UK’s fund industry.

The FCA has privately told ACD providers that a review is on the cards but it has yet to confirm this to the wider public. The delay seems inexplicable but it also silences some awkward questions for the FCA, which pressured Woodford into using Link Asset Services — known then as Capita — as ACD even though it had also been involved in two previous scandals at Arch Cru and Connaught. 

Regulators hope that new rules which came into force this month, known as the senior managers and certification regime, which require personal accountability of key individuals in fund companies, will lead to improvements in standards. 

Chris Cummings, chief executive of the Investment Association, the UK trade body, wrote in FTfm this year that fund managers are operating in an environment where “demonstrably high standards of governance and oversight are more important than ever”. 

He is right and investors across Britain must hope that asset managers together with the FCA are up to the monumental task of restoring public confidence in the battered and bruised investment industry. 



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