Monday’s Panorama was pretty explosive, and for the UK Fund Management industry may prove to be its “Panama Papers” moment. Whilst it is not fair to offer critical comment without the benefit of the reports that will undoubtedly follow from FCA investigations, it may be that these reports shine the spotlight on possible failure of the “3Cs” – Conflicts, Culture and Compliance.

Looking at each of these in turn:

• Conflicts – it is likely that both Woodford and Denning would have earned various different fees from the funds they managed. These fees can include performance and super profit fees in the event that certain criteria are met. These fees are what incentivise managers and in a sense are the risk drivers – and these drivers hold the potential for conflicts of interest. Managers argue that these incentive fees drive performance.

Investors were clearly in awe of Woodford’s Midas touch, but the reality is that the Midas touch requires some element of risk. These risk drivers should be fully spelt out in the fund prospectus so that investors understand the risks they face. Judging by some of the comments by small investors interviewed on Panorama, they may not have understood the risks. In any event that Midas touch turned out to be fools gold! In Denning’s case, allegations that he profited from secretly investing in fund products remain to be tested.

• Culture – A constant focus of the FCA on managers’ is Culture or as they put it “the tone from the top”. Star Fund Managers can squash dissent and insist on pursuing a strategy and taking risks which then go through on the nod. If these people drive the fees for their firms, then other staff members will in practice find it hard to mount a real challenge without some form of backlash. After all, as we know from other high-profile cases in the Press, whistleblowing is a risky strategy that can lead to unemployment! That said, without being close to the issues, for now, it’s hard to know what happened at Woodford.

• Compliance – No mention was made in the reports of the role of the Compliance Officer and his or her team. The FCA rules require all regulated managers to have permanent compliance functions appropriate to the size and nature of their business. From my own personal experience, I can say that the Compliance Officer should always be aware of everything that happens within the regulated business and indeed that is the expectation of the FCA. The FCA Handbook explicitly mandates the Compliance Officer with annual training and ongoing monitoring obligations, which include all coal face staff signing declarations that they have read and understood the Compliance policies and procedures. On this basis, Denning’s claim that he misunderstood, or was wrongly advised on the rules ought not stand up to scrutiny.

If it is found that the Compliance Officer’s failed in their FCA mandated duties, they could personally face significant financial penalties from the FCA, as well as being barred from again holding a regulated position. However, if it turns out that Denning did obscure his interest in the fund targets, then it might have been unreasonable to expect the Compliance Officer to uncover his subterfuge.

The 3Cs’ are all effectively covered in any reputable regulated business’s Compliance Manual. Unfortunately, in the drive for super fees, “stars” may not want to open the Compliance Manual or actually even know what it says. Nevertheless, the 3Cs’ really boil down to the FCA first principal of integrity. No amount of pleading that they never knew the rules will save them from the wrath of the FCA and indeed aggrieved investors.