Will Woodford Debacle Decide Carney's Replacement?

(Bloomberg Opinion) -- The race to succeed Mark Carney as governor of the Bank of England has already taken one twist, with Theresa May’s resignation making it likely that the current Chancellor of the Exchequer won’t be in office to make the appointment. The downfall of fund manager Neil Woodford has cast a shadow over the leading candidate’s chances of landing the prestigious job.

Andrew Bailey has been the head of the Financial Conduct Authority for almost three years. The regulator’s role in the chain of events that led to Woodford freezing redemptions from his flagship fund last week is being questioned by Nicky Morgan, the U.K. lawmaker who chairs Parliament’s Treasury Committee.

With about 3.8 billion pounds ($4.8 billion) of cash now trapped in Woodford’s fund, Morgan has written to Bailey asking him to detail by June 18 how much “supervisory contact” the FCA had with the investment firm. Bailey’s answers may determine whether or not he becomes head of the U.K. central bank.

According to a survey of economists, he had been the front-runner, ahead of rivals such as former Reserve Bank of India governor Raghuram Rajan, and BOE Deputy Governors Jon Cunliffe, Ben Broadbent and Dave Ramsden.

But the embarrassment of having one of the U.K.’s most storied stock pickers drop the gate on a big equity fund on his watch won’t help Bailey’s chances.

My colleagues at Bloomberg News have reported that Woodford Investment Management makes about 65,000 pounds a day in fees from the shuttered fund. On Tuesday, Bailey told the BBC the fund manager “should consider his position” on those payments. A spokesman for Woodford later rejected that call, saying “the company will continue to charge the fee as the fund remains actively managed.”

That’s not a good look when investors are still paying for the privilege of having their money trapped in a fund that’s frozen indefinitely. It’s even worse when the regulator tries to ease their pain, only to be rebuffed by the very people it oversees.

Woodford isn’t the only implosion occupying Bailey’s in-tray. The FCA is investigating how Metro Bank Plc misclassified assets on its balance sheet, a revelation that drove shares in the so-called challenger bank to a record low in February and prompted it to tap investors for additional money.

The pressure is on the FCA to show it can act tough when justified. That certainly wasn’t the case a year ago, when a 12-month probe into Barclays Plc Chief Executive Officer Jes Staley’s attempts to unmask a whistle-blower led to the executive being fined rather than dismissed – an outcome that seemed at odds with the FCA’s insistence that protecting informants is paramount to prevent misconduct in the industry.

And the FCA has yet to explain how vigilant it was – or wasn’t – over the alleged misdoings of Tim Haywood, a fund manager at GAM Holding AG, which were reported to it by a company whistle-blower. GAM was also forced to halt redemptions  in his fund, and has taken a year to offload its illiquid holdings to repay investors.

In the Woodford case, Morgan has asked Bailey to clarify how long investors are likely to have to wait to get their money back. That may be impossible for the FCA chief to say. What he will need to specify, however, is why the watchdog didn’t act as soon as Woodford started listing some of the fund’s privately held investments on the Guernsey International Stock Exchange to sidestep a limit on how much of the pool could be allocated to illiquid assets.

“Simply listing an unquoted company overseas doesn’t in itself make the stock more liquid,” Bailey wrote in an article published by the Financial Times earlier this week under the heading The “Woodford episode raises issues for financial regulators.”

That’s absolutely correct. So where was the FCA when Woodford started rearranging the deckchairs of his illiquid assets?

It’s impossible for any regulator to prevent blow-ups from happening on their patch. After all, that’s why they exist in the first place. But the Woodford debacle has been brewing for such a long time that Bailey will need to show that his agency wasn’t asleep at the wheel – otherwise whichever politician ends up responsible for picking Carney’s replacement is likely to choose anyone but Bailey.

Since that poll was taken, Ofcom chief Sharon White was named chairman of retailer John Lewis Partnership Plc at a salary of 990,000 pounds, more than twice the stipend available at the central bank.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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