FCA tells fund firms to improve governance in wake of Woodford crisis

The City watchdog has blasted firms that are supposed to oversee fund managers such as Neil Woodford.

In a scathing review the Financial Conduct Authority said Authorised Fund Managers (AFMs) suffered from governance weaknesses and conflicts of interest.

Though the FCA’s report did not shame any AFMs by name, it comes in the wake of the Woodford fund implosions that resulted in thousands of ordinary investors losing their savings. 

Loose canon: The Financial Conduct Authority’s review comes in the wake of Neil Woodford’s (pictured) fund implosions that resulted in thousands of ordinary investors losing their savings

Woodford’s AFM was Link Fund Solutions, which was supposed to make sure capital requirements were met and was ultimately responsible for the funds.

All UK funds have an AFM, who is separate from the manager and must ensure the fund complies with FCA rules.

Link is being sued by savers who say it should have kept Woodford (pictured) on a shorter leash.

The FCA said AFMs failed to focus on risks posed to investors by ‘inappropriate or poor value’ funds. 

Some referred to funds as if they were solely operated by the third-party manager, the FCA said, and did not mention their own responsibilities.

Sheldon Mills, at the FCA, said: ‘Some firms are not sufficiently meeting FCA standards and we want to see significant improvement. 

‘We expect firms to look at the key findings on governance structures, conflicts of interest, operational controls, and the other areas highlighted and take action.’ 

Conflicts of interest were raised when Woodford’s flagship Equity Income fund collapsed in 2019.

Investors accused Link of failing to keep a close eye on his management of the fund, as he broke rules on how much should be invested in listed firms, and tried to dodge rules by listing some shares on the obscure Guernsey exchange.

While savers said Link should have spotted this behaviour, industry sources said it could be tricky for an AFM to criticise a manager when it was that same manager who was effectively paying its wages.

Ryan Hughes, of AJ Bell, said: ‘Some findings from the FCA will be of concern, particularly a lack of adequate oversight, a lack of in-depth understanding and a lack of evidence around robust governance procedures. 

‘It is exactly these kind of challenges that have been discussed at length regarding Woodford.’

The watchdog’s review said some findings were also applicable to in-house AFMs.