A listener to the comments of Andrew Bailey of the Financial Conduct Authority on BBC Radio 4's Today Programme this morning (11 June 2019), might be forgiven for thinking that Mr Bailey missed the point of the recent Woodford fund suspension when he said: "we need him to manage these assets now more than ever because his job now is to get this fund back to a position where there can be orderly trading".
It is fantasy to think that the fund's value can somehow return to near pre-suspension levels (and could Mr Bailey have been suggesting that the FCA desires any other type of outcome?). That the FCA cling to this forlorn hope is concerning. It misses one of the key points to this whole saga; the value of Woodford's fund should have included an allowance for the fact that the fund's sheer size means/meant it could not be expected to realise its positions at their market value. And if the fund's pre-suspension value was unrealistic then, how can those heights ever be regained in the near future?
Mr Bailey also stated that as far as he (and one presumes the FCA as a whole) is aware, neither Mr Woodford nor the fund supermarkets through whom investors purchased his fund have breached any of the FCA's rules.
There are two points to pick up on here. First, assuming this is indeed the case, Mr Bailey did not seem concerned that the logical conclusion to this reasoning is that the regulations (and thus the regulator) are failing to protect investors or promote confidence in the markets. It will be fascinating to read what the FCA issues as a response to the logical and reasonable questions asked yesterday by Nicky Morgan MP (Chair of the House of Commons Treasury Committee).
And second, Mr Bailey missed the golden opportunity to drive home the importance of culture and integrity in financial services. Once the FCA's Senior Managers and Certification Regime comes in to effect for fund managers and supermarkets (in December), it won’t be enough to comply with the letter of the law. Participants will have to keep to the spirit of the rules too. So, anyone who knew that Mr Woodford's portfolio of investments was going to struggle to meet the liquidity requirements of the fund, needed to have drawn the FCA's attention to it, as well as telling investors. And there are plenty in the sector who had their concerns. (In a post-SMCR world, the FCA could be able to take action against the fund managers and fund supermarkets. In the here and now, it probably can't.)
But then what could the regulator have said to investors when their own rules have not only failed to stop this situation, but might in fact have inadvertently contributed?
It is almost an article of political and economic faith that ordinary individuals should be investing their savings in the markets. And what could be safer than placing them in the hands of a professional, who is following a stated strategy and complying with copious amounts of regulations?
But, what if the amount of assets being invested in a market (being driven in to the market by political will) is too great for that market to be able to service? Until we are clear that an underlying market can meet the liquidity needs of investors, the expectations of the investors must be managed appropriately.
After all, surely it is preferable to build a better regulatory system which aims to prevent a recurrence of the liquidity dissonance evident in this case, than to allow the industry, media and politicians to satisfy the temptations of ease, expedience and blame by identifying and vilifying a scapegoat only to kick the can to the next failure of this type?