16 September 2019

Financial Times: ESMA hits back at FCA’s criticism of fund rules

One of Europe’s top financial regulators has rebuffed criticism suggesting that design flaws in European regulations contributed to the meltdown at the flagship investment fund run by Neil Woodford, the UK stockpicker.

Fund liquidity has developed into a high priority for regulators following Mr Woodford’s decision to freeze withdrawals from his flagship fund, a move that has sparked fury among investors.

Debate over whether the rules are fit for purpose has also been fuelled by the suspension of investor withdrawals by UK property funds following the Brexit referendum in 2016, as well as more recent problems involving holdings of illiquid assets at GAM, the Swiss asset manager, and separately at H2O, a boutique owned by Natixis.

Steven Maijoor, chairman of the European Securities and Markets Authority, the regional regulator, said that policymakers “need to be careful” about the suggestion that changes were required to the regulatory framework covering Europe’s €10tn mutual fund industry following the problems arising from the Woodford case.

Mr Maijoor was responding to earlier comments by Andrew Bailey, chief executive of the Financial Conduct Authority, the UK regulator, who said that the Woodford affair was an example of a manager “following the letter, but not the spirit” of the rules. “It raises questions about the rules themselves,” said Mr Bailey.

Public disagreements between senior regulators are rare. The divergent views expressed by Esma and the FCA also highlight simmering underlying tensions about the post-Brexit regulation of the UK’s asset management industry given London’s vital function as a provider of investment finance across the whole of Europe. [...]

Mr Maijoor said there already were “clear principles established in Ucits” that asset managers must uphold.

“We need to be careful about the suggestion that Ucits has to be changed [in response to the problems that have emerged at Woodford Investment Management]. It is important to emphasise that Ucits already establishes the principle that funds must be able to comply, at any time, with the obligation to redeem investors upon request,” said Mr Maijoor, speaking exclusively to the Financial Times. 

One highly controversial tactic adopted by Woodford Investment Management was its attempt to keep within Ucits liquidity rules by listing stakes in some of its illiquid holdings on the Guernsey stock exchange.

This move, said Mr Bailey, was “allowed under Ucits” even though it was also “on the wrong side of the spirit” of the regulations. “There is a responsibility on every asset manager to ensure that the liquidity of their fund conforms with the Ucits regulations. If a fund manager has information to the contrary [that his illiquid holdings breach the rules], then he should act on it,” said Mr Maijoor. [...]

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