The City regulator announced that more than 300,000 investors of Neil Woodford’s Equity Income Fund would receive compensation totaling about £235million to cover the losses incurred when his company failed.
Financial Conduct Authority stated that Link Fund Solutions, administrator for the Woodford Equity Income Fund had agreed to pay the compensation due to its failures. The Financial Conduct Authority made the decision after an investigation that raised “serious concerns” about Link Financial Solutions’ management of the fund’s liquidity.
Therese chambers, executive director for enforcement and market supervision at the regulator said that Link Financial Solutions’s actions “appear” to have caused substantial losses for investors who remained invested in the fund after it was suspended.
She stated that the proposed redress is contingent on the sale of Link Group’s fund solutions business. “It offers investors the best opportunity to achieve a better result than could be achieved any other way and it’s in their interests to be given the opportunity to consider it.”
Woodford Investment Management failed in 2019. Woodford was the founder of Woodford Investment Management. had raised more than £10billion from small investors thanks to his stellar record of stock selection. His funds became troubled when he shifted his focus from publicly listed stocks to unlisted, higher-risk equities. He also began to use unconventional measures to stay within liquidity rules.
The regulator stated Link Fund Solutions made critical errors in managing Woodford Equity Income Fund’s liquidity. The fund was unable to maintain a suitable and reasonable liquidity profile as of September 2018. Investors had already started to depart by that time.
The FCA stated that Link Fund Solutions failed to measure the liquidity of its fund properly, which resulted in those who left the fund benefiting disproportionately from the sale of the most liquid assets. The FCA said that those who were still invested in the fund when it was suspended received an unfair treatment because they got a disproportionate amount of the remaining assets.
Link Group will make a substantial voluntary contribution to the redress, despite its claim that it is not legally responsible for any losses. Link Group, including Link Fund Solutions, is selling its fund solutions business to Waystone Group, and it’s expected that the sale will generate about £140million.
The regulator calculated that the losses to investors due to failures in the liquidity management could be as high as £298m. This is “substantially more than the remaining assets” at Link Fund Solutions. It was for this reason that the watchdog began talks with Link to “reduce the shortfall as far as possible”.
The authority stated that if the proposed redress amount of £235million is paid, investors will recover approximately 77p per pound. The FCA has said that if Woodford Equity Income Fund shareholders do not approve the scheme, it will proceed with the enforcement case against Link Fund Solutions. Link Group will not contribute to the case and any compensation would depend on the result.
The regulator reported that since the suspension, a total amount of £2,56 billion has been paid out to investors.
Investigations continue into the other parties involved in the Woodford Equity Income Fund suspension. These investigations continue. Leigh Day is also pursuing an investor group claim against Link, which it claims involves 13,000 investors.
Woodford shareholders will have to vote on the settlement.
Jason Hollands is the managing director of Bestinvest an online investment platform. He said that it would be impossible for this to not be approved as the amount of redress is more than LFS’s [Link Fund Solutions] value. LFS, therefore, would almost certainly challenge the enforcement if the settlement was not supported.
“While it will bring closure to some, many private investors will have a bitter aftertaste.”
Link stated that the settlement would also be contingent on the High Court sanctioning the scheme through an arrangement. It will provide an update by July.