Experts claim that the City regulator’s £230m compensation deal for Woodford Investors is “likely” to set a “dangerous precedent” for UK finance by removing the “cornerstone protection” of investors.
Five academics with expertise in financial regulation wrote to the High Court Judge who will decide whether or not to approve the scheme. They warned that the scheme could “constitute systemic risk for the UK economy”, by establishing the principle that investor protections, such as access to Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS), can be removed.
Last month, the victims of the failure of Neil Woodford’s principal investment fund have voted in favor of the deal. The High Court is expected to sanction the deal at an upcoming hearing on Thursday.
Link Fund Solutions, administrator of Woodford Equity Income Fund said last month that 93,7% of investors voted for the deal. The Financial Conduct Authority orchestrated the “scheme-of-arrangement” which means investors will no longer be able sue Link Fund Solutions or complain to the Financial Ombudsman Service to tap into a larger compensation payout from the industry funded Financial Services Compensation Scheme.
In the letter it states: “We are worried that if approved, the proposed scheme, in its current format, will strip affected investors of all their legal protections.” The investors would have to suffer this many years after relying on boilerplate statements stating that these protections existed and making their investment decisions with good faith. This ruling would set a dangerous precedent in the UK financial services industry.
Academics warn the scheme may have unintended consequences, such as increasing volatility on the market and diluting the trust of market participants. It could also damage the reputation of UK financial services. If the primary legislation’s clear and unambiguous protection guarantee were to be undermined, there would be good reason to expect a loss in confidence.
Signatories included Markus Krebsz, professor at Woxsen University, and member of an economic commission of the United Nations; Steve Keen a professor who was said to be one of the very few professors that predicted the global financial crises; and Andrew Clare a Bayes Business School professor and trustee of many corporate pension schemes.
The High Court has been asked to investigate whether the FCA had conducted a “detailed assessment of the removal of these protections”, and if the Treasury and Bank of England were consulted. Imagine how the global financial crash of 2007-10 would have unfolded if consumers had any reason to believe that the FSCS coverage on their bank deposits was not 100% bulletproof.
A total of 300,000 private investors and institutions suffered heavy losses in 2019 after the popular Woodford fund first was suspended due to a flood of redemption requests. It was then liquidated.
Transparency Taskforce is a consumer group that has filed a legal complaint against the scheme. It warns that it “drives a coach and horse through the statutory rights of investors” and may therefore be illegal.
The regulator indicated that it was up to the courts to determine whether the removal of protections is legal. It also stated that this scheme “offers a quick and easy way for most people to seek redress.” Other methods of compensation, such as the FOS, the FSCS or litigation are not guaranteed.
The letter was also signed by Andy Schmulow an associate professor of Law at the University of Wollongong in Australia and co-editor of The Cambridge Handbook of Twin Peaks Financial Regulation, as well as David Llewelyn emeritus Professor of Money and Banking at Loughborough University, and former Chairman of the Banking Stakeholder Group of the European Banking Authority.