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Woodford’s battle to become regulation proof

Woodford’s battle to become regulation proof

The restructure of Woodford Investment Management’s legal department once again exposes the regulatory challenges facing start-ups.

Chief operating officer Nick Hamilton and chief legal compliance officer Gray Smith resigned from the firm on Tuesday. While the full reasons for the departures are not known, the exit of Hamilton was particularly surprising as his relationship with the firm's founder, Neil Woodford, dates back to Invesco Perpetual, and he had relocated from Australia to take up the post with the new firm.  

The double exit was accompanied by news Woodford had hired James Newman as head of operations from Egerton Capital. He joins Simon Obsorne, who was recruited as head of compliance, and Gavin St John-Heath, chief risk and operations officer.

The timing of this is interesting as it comes hot on the heels of a detailed report from think-tank New City Initiative (NCI) outlining how hard it was to build a viable business in the current regulatory climate.

The NCI, which is the voice of 52 small and medium sized asset and wealth managers, called on the Financial Conduct Authority to employ a more ‘flexible’ approach to regulation, taking into account a firm’s size. It accused the financial watchdog of 'suffocating' small firms with 'excessive' regulation.

Within its 28-page paper NCI described a new ‘priesthood’ of compliance offers emerging in the wake of the financial crash.

It also highlighted how the FCA demands start-up firms appoint compliance consultants for a period of six-18 months, resulting in more costs – typically £3,000 a month.

‘You can do nothing about this extra burden, only accept it. The sheer amount of paperwork is astonishing,’ NCI said. ‘All this means extra staff. In the early 2000s a new firm could get by with one staffer dedicated to compliance, legal, HR and operational risk management (internal audit), in addition to a chief operating officer.'

Coincidentally, a major restructure at the FCA was announced the following day. Thye regulator intends to merge its authorisation and supervision divisions with the intention of clearly distinguishing how small and large firms are regulated.

Hargreaves Lansdown head of research Mark Dampier reckons the overhaul at Woodford IM makes perfect sense.

‘Essentially the legal and compliance (and also the risk and operations) parts of the business have been separated which is perfectly natural in a growing business,’ Dampier said.  

‘The departures will make the headlines but overall it’s clear to see the strengthening of the operations team is positive. There is no impact on the way Woodford manages the funds and investors should not be concerned.’

Woodford has said the big advantage of setting up a business is the ability to operate from a blank canvass and his firm is unlikely to resemble the Invesco Perpetual.

Back then it was easier to set up a fund firm. In today’s world you need a lot more than reputation to build a successful fund enterprise - Messrs RussellRice and Pease take note.

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