The Financial Conduct Authority (FCA) which is the UK financial watchdog is considering putting more restrictions on how funds can be invested into companies not listed on stock exchanges.
This stems from the recent suspension of the Woodford Equity Income fund. Run by celebrity fund manager Neil Woodford, many investors were expecting him to invest in safe and trusted funds but he put them in assets that cannot be easily converted into cash and not are not easily tradable.
When Woodford investors decided to get their money back, they received an unpleasant surprise.
Kent County Council made the biggest withdrawal for £250 million and Woodford did not have the cash ready. Investors have waited for over 3 months to collect their investments but are yet to be paid. The FCA went on to suspend the Woodford Equity Income fund.
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Current Rules Not Effective Enough
The FCA pointed out that the Woodford suspension caught many investors by surprise and showed that retail investors were not aware of the liquidity risk that they had been exposed to. The current rules were not enough to warn them about the problems with Woodford’s investments.
This is why the FCA plans to implement the rules changes that were proposed last October. There are two main elements to the rule changes. For one, funds investing in inherently illiquid assets (FIIA) will be classified as just that and will have specific rules to govern them. This includes increased oversight of their deposits and informing the FCA about how the funds are operating. FIIAs should also be able to provide plans on how they can give investors their money back when requested.
The second element is that if an independent assessor thinks that a fifth of the fund’s assets are materially uncertain, then the fund will be suspended.
Consequences Of Rule Changes
In a statement, Christopher Woolard, FCA’s executive director of strategy and competition, said
We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected. The new rules and guidance are designed to protect the interests of investors particularly during stressed market conditions. This includes those wishing to redeem their holdings, as well as those wishing to remain invested in the fund.
Woolard also pointed out that managing the liquidity risk of the funds is the responsibility of the fund manager and that they should be looking out for their investors.
Though these new rules may result in more fund suspensions, the fact that investors are better protected is worth the change in rules.
