It has been a busy week for the UK regulator, with actions from the five-year-old case of fund manager Neil Woodford and his suspended fund, and a decision to reverse rules on the bundling of sell-side research. In the latter case, the action is designed to boost asset management and the wider financial market.

The UK’s Financial Conduct Authority has started regulatory enforcement action against Woodford Investment Management (WIM) and prominent City figure Neil Woodford. 

This announcement comes nearly five years after the investigation began into the collapse of a fund in which about 300,000 people had invested money. The fund suspension was taken to stem further haemorrhaging after Kent County Council requested to pull £250 million ($317 million) in pension investments from Woodford's Equity Income Fund, citing continued underperformance.

The Woodford Equity Income Fund (WEIF) was suspended in June 2019 amid a liquidity crunch. 

In March last year, Link Fund Solutions, with the support of its ultimate parent, Link Administration Holdings, proposed a scheme which would see them pay redress to those who were invested in the WEIF at the time of its suspension in June 2019. The FCA has proposed a £235 million ($295 million) compensation package for investors who were trapped in the fund.

The FCA alleges that WIM and Woodford failed to act with due skill, care and diligence during the 11 months from 31 July 2018 to 3 June 2019, when Link decided to suspend the fund.

Link Fund Solutions (LFS) failed to act with due skill, care and diligence in its management of the WEIF, the FCA found, according to a statement.

The case, which ended Neil Woodford’s once stellar reputation as an asset manager, raised questions about the management of the fund and the underlying liquidity of its holdings.

“It is striking that the FCA’s only criticisms of Neil Woodford relate to his involvement in matters relating to the fund's liquidity framework, which was, in fact, Link's responsibility and supervised by the Depositary (the Depositary is responsible for the safekeeping of the Fund’s assets and for overseeing the fund’s Authorised Corporate Director) and the FCA,” according to law firms WilmerHale and BCLP (Bryan Cave Leighton Paisner). 

“Even though, as Authorised Corporate Director, Link delegated the daily investment management responsibilities to WIM, it remained the fund manager and retained ultimate responsibility for the running of the fund. As the delegated Investment Manager, WIM was required to manage the fund in accordance with both the liquidity framework and all the other portfolio constraints set by Link,” the firms said.

“Central to the failings alleged against WIM and Mr Woodford is the FCA’s claim that the framework used to measure and monitor the fund’s liquidity risk and the corresponding parameters of the fund’s liquidity were not appropriate.”

FCA, MiFID II 
In a separate case this week, the regulator is also rowing back from legacy European Union rules banning the “bundling” of investment research, reflecting the UK government’s wish to cut red tape and boost the country’s financial services sector. 

The Financial Conduct Authority (FCA) has put forward plans for a new way to pay for investment research. 

The watchdog said earlier this week that it will allow the bundling of payments for third-party research and trade execution, and would exist alongside those already available, such as payment from an asset manager's own resources or from a dedicated account. 

“Analysis by the FCA shows that asset managers are largely getting the research they need under the current rules. However, the current options available to UK asset managers can be operationally complex and may, in some instances, favour larger asset managers. The current rules can also restrict UK asset managers’ ability to buy investment research produced outside the UK,” the FCA said. 

The UK government, which is seeking to carve out more regulatory freedom now that the UK is outside the European Union, has a package of “Edinburgh reforms” to boost activities such as the London stock market. Listings in London, for example, have been slow in recent years, with firms such as CRH, one of Europe’s biggest building materials companies, and Softbank-owned Arm, a UK technology industry, choosing New York rather than London for their main listing venue.

Under the EU’s Markets in Financial Instruments Directive, commonly known as MiFID II, the UK – then an EU member state – enacted reforms including unbundling of sell-side research. The directive was transposed into UK law in 2018. It was designed to protect investors from mis-selling and to ensure that they are not put into investments that do not suit them. This “unbundling” process did not start with MiFID II but it accelerated in the EU. One effect, as this publication was told by UK-based brokerages such as Peel Hunt, is to squeeze the amount of sell-side research on companies. Small- and medium-sized firms are not as widely covered as they were a few years ago. And this cut in coverage reduces liquidity and increases volatility in some of these firms’ shares, practitioners say.

Compatible
The FCA said the new plans fit with rules governing research payments in certain other major jurisdictions, making it easier for asset managers to buy research in the same way, across borders.  

“We are proposing to provide more options on how to pay for such research, helping boost competition and making it easier to buy research across borders,” Sarah Pritchard, executive director, Markets and International, FCA said.  

The FCA said it intends to produce final rules in the first half of 2024, after considering the feedback it receives, but the timetable will be determined by the amount, strength and breadth of the information gathered in the consultation.