Enforcer fails the trust test
THE world’s major central banks have been running the printing presses at full pelt since the start of the pandemic. Even as recovery takes hold the Western democracies show a marked reluctance to apply the brakes and be blamed for choking off recovery.
Too much money chasing too few assets is distorting the world of investment.
The rise and fall of cryptocurrencies, the tale of Robinhood and meme stocks, the bubbly world of Special Purpose Acquisition Companies (SPACs) and surge in private equity deals to $500bn in the past months arise from excess money creation.
Wm Morrison would not be genuflecting in the face of a £6.3bn overseas bid were there not so much cash seeking new homes.
The City regulator the Financial Conduct Authority warns of the dangers to consumers of untrammelled and thinly policed markets. It makes it even more imperative that savers trust in regulated assets. The FCA failed miserably to protect investors tempted to put their money into London Capital & Finance (LCF), even though warning signs were flashing red. It could at least claim that the product being sold fell outside its perimeter of responsibility.
The same cannot be said for investors who trusted in Neil Woodford’s collapsed investment empire. The 300,000 or so savers who were tempted into Woodford funds by broker Hargreaves Lansdown’s now cancelled ‘Wealth List’ can feel only anger when they receive quarterly statements. The minus signs by Woodford-related holdings are a bitter reminder of losses.
As disturbing is that the FCA investigation into this scandal has been so slow. There is a suspicion that the lack of urgent due process is as much about protecting the reputation of the FCA’s former chief executive Andrew Bailey – now governor of the Bank of England – as anything else.
DAME Elizabeth Gloster’s excoriating probe into the policing of LCF offers insight into the potential damage which could be caused by the Woodford affair. An insight into the flimsiness of FCA supervision of funds is provided by its ‘review’ of authorised fund managers. These are the one-step-removed firms authorised by the FCA to make sure that investment funds enforce simple rules such as those on liquidity. It was the over-exposure of Woodford to unquoted shares and efforts to disguise matters by offloading stocks onto the illiquid Guernsey stock market which triggered the crisis. The FCA review revealed lax oversight and weak governance in the firms responsible for protecting tens of billions of pounds of savings.
No mention is made of Woodford’s authorised manager Link Group in the anonymised FCA document. There is no disguising why the study – which exposes glaring conflicts – was required.
The report into authorised managers barely scrapes the surface of the Woodford imbroglio. At every level the system failed savers. Funds and trusts are designed to protect investors from risk by devolving responsibility to authorised professionals.
As Woodford headed for the buffers, the FCA was asleep and Hargreaves Lansdown cavalierly was promoting and trusting its own funds into the faithless guru’s hands.
It has been a disgraceful episode yet all of those involved have so far escaped culpability, justice and a requirement for full compensation.