Investors in the Woodford Equity Income fund are to receive redress nearly four years after the fund’s suspension.
The Financial Conduct Authority has concluded its investigation into Link Fund Solutions, the fund’s authorised corporate director, with an agreement that £235mn will be paid to investors following “critical mistakes and errors” it made in managing the fund’s liquidity.
The FCA had originally estimated LFS’s liquidity management failures to have resulted in losses of £306mn, but in a statement today (April 20) the regulator said this was substantially greater than Link's remaining assets.
Link Group, LFS's parent company, will make a voluntary contribution to the redress as it considers it has no legal responsibility for the obligations of LFS.
The redress payment is made up of LFS's assets plus part of the proceeds from the sale of LFS (without the Woodford liability) to Dublin-based Waystone Group.
In its investigation, the FCA said that as authorised corporate director, LFS had responsibility for ensuring the fund operated with appropriate liquidity risk management and controls, and that all investors were treated fairly.
The FCA considers LFS made critical mistakes and errors in managing Woodford Equity Income's liquidity with the result that the fund failed to have a reasonable and appropriate liquidity profile from September 2018.
The regulator said that by November 2018, this failure meant investors leaving the fund from that point onwards “benefitted disproportionately” from access to the most liquid assets in the fund which were sold.
Those who continued to hold investments in the fund at the time of its suspension in June 2019 were treated unfairly, as they had a disproportionate share of the remaining assets, which were more illiquid, the FCA said.
The sale of LFS will generate up to £140mn in proceeds. The FCA has received information from Waystone and assurances from LFS and Link Group that this represents fair value. LFS's assets include up to approximately £80mn in net proceeds from selling its business, together with a contribution of up to approximately £60mn from the sale by Link Group of the rest of its Fund Solutions business.
Link's contributions are dependent on the approval of the investors in the fund entitled to redress, and will also require court approval.
If the full amount is paid to investors, they will have recovered approximately 77p in the pound.
But the redress does not include investment losses that may have arisen as a result of any poor financial performance of the investments held by the fund.
Therese Chambers, executive director of enforcement and market oversight at the FCA, said: ”The FCA’s investigation raised serious concerns about Link Fund Solutions’ management of the liquidity of the Woodford Equity Income Fund.
“LFS’s actions appear to have caused significant losses for those investors who remained in the fund when it was suspended.
“We believe the proposed scheme offers investors the best chance to obtain a better outcome than might be achieved by any other means and it is in the investors’ interests they be given the chance to consider it.”
The FCA said other parties are still under investigation in relating to “the circumstances that led to the suspension” of the fund.
AJ Bell's head of investment partnerships, Ryan Hughes, said the news would come as “significant relief” for investors who have been “very patiently waiting” for some form of compensation.
“While approval of this redress scheme with Link would close the case and liabilities against them, the FCA points out that this remains a live investigation with other parties remaining under investigation," he said.
“As a result, the Woodford drama will drag on past the four year mark but many investors will no doubt be glad that significant progress now looks to have been made.
“While it will take some time for this redress process to complete and for payments to be made, investors are one step closer to being able to finally put this whole sorry episode to bed.”
sally.hickey@ft.com
