Letters to Fund Managers – What FCA Wants You to Know

January 31, 2020, marked the end of a 47-year union between the United Kingdom (UK) and the European Union (EU) – Commonly known as Brexit. After the UK’s withdrawal from the EU, the Financial Conduct Authority (FCA) expects the separation to have a significant impact on the country’s wealth management and investment sector. With this in mind, the regulatory body is working with stakeholders in the industry to actively monitor the effects of Brexit on the market [FCA].

One of FCA’s mission is to protect consumers against the ill conduct of financial services providers, which is why they have sent out communications in the form of ‘Dear CEO’ letters to remind financial services companies of their responsibilities and also for the regulatory body to have better regulatory oversight.

The investment sector is highly watched by the FCA due to its vital role in the economy as its business involves the management of millions of funds. Marc Teasdale, Director of Wholesale Supervision at FCA, said that investment firms play an essential role in overseeing the savings and investments of the people. Even as the sector continues growing, fund managers should remain faithful to their duties in protecting their clients’ investments and enhancing it over the long-term [Morningstar].

One of the highlights of the Dear CEO letter is the issue of liquidity in investments. The cumulation of issues with Woodford Investment Management[KT1] [TT2]  led to its closure on October 15, 2019, is an example of why illiquid assets and alternative investments can place investors at a financial risk.

The Implosion of Woodford Investment Management

Millions of people place their trust in fund managers to protect and grow their investments which often constitute their savings or retirement funds. However, when these funds are not properly managed, it can affect the lives of several hundred thousand people, much like what happened with Woodford Investment Management.


Known as one of Britain’s best fund managers, Neil Woodford, during his time at Invesco Perpetual was able to avoid the disastrous effects of both the 1990s dot-com bubble as well as the 2008 financial crisis. 

His stellar reputation during those times helped spark the interests of individual investors and companies when he left to set up his own investment firm – the Woodford Investment Management in April 2014. He raised a total of £1.6 billion to launch their flagship fund, the Equity Income Fund. The following year, he raised £800million for Patient Capital, a listed investment trust..

Challenges Faced

Things seem to be going well for Woodford as its reputation continued to grow even though the company revealed in March 2016 that the value of  Woodford Patient Capital Trust had plummeted. Despite the event, Woodford’s reputation continues to be a magnet to draw in investors, allowing them to raise £553 million when they launched the new Income Focus launched in 2017 and investments continued to flow into the flagship fund till it peaked at £10.2 billion.

Woodford had a keen interest in start-ups, unquoted listings and alternative investments which are of a riskier asset class. As per FCA’s policy, exposure to these types of investments should be limited to 10% due to the high risks involved. However, the investment firm continued to increase their funds’ exposure to these high risks unquoted firms which eventually led investors, such as Jupiter Melin, pulling out.

The Woodford fallout

With a series of major stock-specific blowups, the Woodford Investment Management experienced immense pressure in 2017. Their investments continued in a downward spiral, which eventually led to the closure of the company on October 15, 2019.

An investigation by the FCA found that over 20% of their investments were in the alternative markets, more than twice the limit set by the FCA. Although illiquid and alternative assets such as infrastructure, property and renewable energy were attractive as they yielded higher returns, they also came with higher risks such as the lack of independent research as well as the ability to sell assets easily and quickly[KT3]

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Lessons Learnt: The Importance of Liquidity

The regulatory body took a firm stance regarding the importance of liquidity in an effort to uphold the interest of the investors. Asset liquidity is one of the priorities that was listed in a recent letter to the investment industry. The following are parts of their supervisory strategy to address the issues in the UK’s wealth management industry:

  • Liquidity management
  • Governance of investment firms
  • Operational resilience
Desfran - Letters to Fund Managers – What FCA Wants You to Know
Desfran – Letters to Fund Managers – What FCA Wants You to Know

Liquidity Management

Illiquid assets can be challenging to sell, which means investors will not be able to cash out their investments immediately and it exposes clients to market risks and the potentially the loss of all their investments. The FCA is reminding investment managers to review the liquidity risks in their funds.


To ensure that the firm is delivering high value to their investors, the FCA expects stakeholders to take steps in recognising any conflicts of interest. Concomitantly, the regulatory body is also hoping that the governance of investment firms will be in line with the Senior Managers & Certification Regime (SMCR) requirements. 

Operational Resilience

Fund and asset managers rely on robust and reliable technology to ensure that business operations run smoothly. It is also essential to use these technologies to protect a client’s assets and avoid cyber risks. To ensure that the firm’s robust technological infrastructure is able to protect its investors, the FCA will conduct ad-hoc tech reviews to ensure that a firm’s cyber risk control system is active.

With the UK currently undergoing the implementation period where it negotiates its future terms and conditions with the EU, the FCA is urging investment firms to consider how this implementation will affect their business and investors after December 31 , 2020, so that the financial industry will be ready for its next chapter in 2021. 

Investing in the UK’s Financial Sector

As the FCA continues to take a stand and implement policies that will deliver value to investors, this may also make investing in the country daunting. However, a thorough understanding of the country’s financial industry will help you navigate the landscape and grow your investments efficiently. Let Desfran’s team of seasoned experts help you make smart investment decisions in the UK financial and wealth management sector. 

Contact us today. 

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Our Mission 2017: How we regulate financial services, FCA.org.uk

Dear CEO letters show FCA means business, Ftadviser.com

The Woodford blog: Charting the rise and fall of a star fund manager, Portfolio-adviser.com

Guide to financial protection in the UK, FSCS.org.uk

Woodford implosion: key dates in fall of an investment empire, Citywire.co.uk

What are the risks of alternative investments, Whatinvestment.co.uk

Asset Management Portfolio Letter [PDF], FCA.org.uk

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