The suspension of the LF Woodford Equity Income Fund on June 3 after a rush of redemption requests has upset investors and politicians, who have demanded answers from the regulator over what went wrong.

Financial Conduct Authority Chief Executive Andrew Bailey, responding in a 10-page letter to questions from senior British lawmaker Nicky Morgan, said the watchdog had opened an investigation.

Bailey's letter lays bare the long-running nature of the fund's liquidity issues and also points to errors in communication between the FCA and authorities in Guernsey, where some of Woodford's stakes in mostly private companies were listed.

The FCA had already said it was looking at how Woodford invested in illiquid companies on an exchange in Guernsey. There is a 10% cap on a fund's investments in illiquid assets, but the letter showed the watchdog had had concerns for some time.

Bailey said the FCA had been in touch with Link, Woodford's Authorised Corporate Director and the regulated manager of the fund, since February 2018 regarding issues related to "liquidity risks" from the Woodford fund.

"In February and March 2018, the FCA engaged with Link in connection with two breaches of the 10% limit on the maximum proportion of unlisted securities held within WEIF," Bailey said.

"Following our engagement, these breaches were each notified to us as resolved within a timeframe we had agreed with Link."

From April to December 2018, the regulator held monthly monitoring discussions with Link and no further breaches of the 10% limit were notified.

On April 11, 2019, trading in three of Woodford's Guernsey listed shares had been suspended. While authorities in Guernsey contacted the FCA on April 15 to discuss the issue, a communication error meant talks did not take place until May 8.

Bailey said that the proportion of assets in the fund that were estimated to take over 180 days to liquidate had increased from 25% on June 30, 2018 to 33% by April 30, 2019.

In separate statements, Link confirmed that the FCA was beginning an investigation into its actions and said it had acted within the rules at all times.

A Woodford spokesman confirmed the company was also speaking to the FCA and "will be co-operating fully".

(Reporting by Huw Jones, Carolyn Cohn and Simon Jessop; Editing by Rachel Armstrong and Jane Merriman)

By Huw Jones, Simon Jessop and Carolyn Cohn