FCA: UK could review 'flawed' UCITS rules after Brexit

Out-Law News | 28 Jun 2019 | 4:19 pm | 1 min. read

The UK could review its application of EU retail investment fund rules after Brexit, the chief executive of the Financial Conduct Authority (FCA) has said.

Andrew Bailey told the House of Commons Treasury Committee that the regime set out in the EU's Undertakings for Collective Investment in Transferable Securities (UCITS) regime may have been exploited by the Woodford Equity Income Fund, trading in which was suspended earlier this month.

Both Bailey and FCA chair Charles Randell criticised the rules this week in evidence to the committee, which is currently investigating the Woodford failure. The FCA has confirmed in a letter (10-page / 4MB PDF) that it has opened its own inquiry into events at the fund.

The UCITS rules limit the amount of illiquid assets a retail investment fund can hold at 10%. The rest must be listed on an approved stock exchange. Illiquid assets are those that cannot be easily converted into cash, such as property investments or unlisted securities.

Bailey told the committee that the Woodford fund breached the 10% cap on two occasions last year. The fund also listed some illiquid assets on the Guernsey stock exchange but did not trade them, allowing it to stay within the limit on a technicality. It did not inform the FCA that it had done this.

"It was using the rules to the full, and it was not telling us that it was doing that," Bailey told the committee.

"Here we get to what I call the 'rules versus principles' point. In my view, as I have said quite a bit recently, we should have much more of a principles-based system with enforceable principles, because quite clearly there is a distinction between what we might call the principle of the whole thing and what the rule is delivering. The principle is that there should have been an open conversation about the situation of the fund, which … would have brought this all out much more clearly," he said.

Bailey went on to describe the UCITS regime as "excessively rules-based", as opposed to the principle, or outcomes-based, approach favoured by the FCA.

"[In] a post-Brexit world … we will see how much scope we have effectively to change the structure of [the] regulatory system," he said. "We will see about UCITS, frankly."