A formal investigation has been launched by the City watchdog into Neil Woodford’s suspended equity income fund in the latest blow for the under-pressure investment guru.

In a letter to the Treasury Select Committee chair Nicky Morgan, Financial Conduct Authority (FCA) chief executive Andrew Bailey confirmed the probe, but said he could not comment further.

The FCA has previously said it would launch a formal investigation if it “believes there are circumstances suggesting serious misconduct or non-compliance with the rules” surrounding the events leading up to the fund’s suspension earlier this month.

It is understood the inquiry is related to Mr Woodford’s Guernsey-listed assets amid concerns the move was made to sidestep rules limiting the proportion of illiquid assets in the fund to 10%.

The FCA revealed that at one stage the equity income fund had around 20% invested in illiquid assets – those that are hard to trade, sell or value.

Mr Bailey said the regulator had made contact with the fund’s authorised manager Link Fund Solutions relating to two breaches of the 10% limit.

The Treasury Select Committee is holding a hearing with Mr Bailey on the Woodford fund next week.

Confirmation of the probe comes as the Woodford crisis deepened with Fidelity Personal Investing blocking customers from putting cash into a second Woodford fund.

Fidelity said it was restricting new investments into the LF Woodford Income Focus Fund – a sister fund to the suspended £3.7 billion Woodford Equity Income Fund – as a “temporary and precautionary measure”, although withdrawals are not affected.

A spokesman for Fidelity said: “We believe this is in the best interest of our platform clients unless and until uncertainties are resolved and we are not restricting withdrawals from Woodford Income Focus.

“The restrictions are a temporary and precautionary measure.”

The equity income fund was suspended on June 5 preventing investors from withdrawing their cash after millions of pounds had previously been taken out following a run of poor results.

Due to many of the investments being made into unlisted companies, selling the shares to repay the cash has proved difficult.

Separately on Tuesday, Bank of England policymaker Anil Kashyap warned the suspension of the Woodford equity income fund could become a “very big problem” if it undermines investor trust in the financial system.

Mr Kashyap, an external member of the Bank’s Financial Policy Committee (FPC), told MPs on the Treasury Select Committee the Woodford saga was being watched closely for signs of “spill over” into the wider system.

He said, while the fund’s suspension is not a financial stability risk at the moment, it could pose problems if it sparked a run on similar investments.

He said: “I don’t think Woodford per se creates financial stability risks, but if it undermines confidence in the system it could be a very big problem.

“It’s a very visible thing and has got people worrying about whether or not it is going to be present elsewhere.

“We’re going to keep watching it and if it ever gets to the point where there’s substantial assets in a vehicle like that, that could give rise to widespread spillovers, we’d have to do something about it,” he added.

In a hearing on his reappointment for a second term to the FPC, the US-based expert said even a modest sized investment vehicle could potentially “destroy trust” in the system, which could lead to a run of investments.