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Woodford scandal raises governance questions

corporate_governanceThe scandal surrounding the gating of the Woodford Equity Income Fund (WEIF) has exposed the often overlooked but vital role of the authorised corporate director (ACD) as well as other governance issues.

ACD functions may be kept in house by investment houses or, as in the case of the WEIF, delegated to external providers such as Link Asset Services.

The role of the ACDs is to make sure that funds are run in the best interest of investors and that the rules are followed.

In a recent article in Funds Europe, Shiv Taneja, founder and chief executive of the Fund Boards Council, a professional members organisation which promotes good governance on fund boards, said that that the Woodford debacle has thrown open serious issues around the governance of funds.

“The Woodford situation is an extreme example of how desperately wrong things can go when there is either an absence of governance or when organisations don’t do what they are supposed to do,” he said.

“This was the perfect storm around regulation and the governance of asset management.  Things couldn’t really get any worse where you have a situation where a distributor acted as a sort of cheerleader for the fund manager, possibly at the cost of a lot of their clients' money.”

Taneja believes there has been “a complete breakdown of multiple sets of actors”, with failures at four levels: the regulator (the FCA), the external outsourced governance team otherwise known as the ACD (Link Asset Services), a distributor (the online broker Hargreaves Lansdown, whose clients held 31% of the gated fund at the end of 2018) and Woodford IM itself.

“I think each one of them has got to take responsibility for certain things that they ought to have done and didn’t do that could have mitigated risks,” said Taneja.

Asked whether the 10% cap on unlisted securities is reasonable, Taneja replied that the question of whether there should be a cap of 5, 10 or 15% “is as much an academic, intellectual and technical discussion as a governance one per se”.

“The regulation as it stands is very clear about open-ended mutual funds operating on the basis of daily pricing. The question then is to what extent should you allow them to hold illiquid assets?”

“If somebody wants exposure to higher levels of risk then why not just buy a closed-ended fund, an investment trust, for instance, and you could have all the risk you like without the issues around gating.”

Taneja believes that the relationship between Woodford IM and Link Asset Services – whereby Link provided a fiduciary service to Woodford as part of a commercial arrangement – throws up key questions that will need to be addressed sooner rather than later.

“I see an inherent tension in that relationship,” he said. “How can one company exert fiduciary responsibility upon another if it is being paid to do so?”

“This is very different to other forms of investment management outsourcing, which tend to be largely transactional, and not about the more nuanced issue of governance.”

Hargreaves Lansdown’s role as distributor and the basis on which its “Best Buy” lists are drawn up as well as “the extent to which Hargreaves Lansdown came across as a cheerleader for Woodford”, should also be scrutinised, Taneja believes.

This is because it is not clear to investors whether Hargreaves Lansdown’s Best Buy lists were put together purely on the basis of performance or whether some commercial element (such as the offering of discounts) formed part of the equation.

Hargreaves Lansdown says that an explanation of how it chooses funds, along with a sector by sector performance analysis of the Wealth 50, is published on its website.

The whole article can be read here.

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