Woodford saga set to continue despite redress plan for investors

The redress of up to £235mn is to cover losses to more than 300,000 investors, as a result of Link Fund Solutions’ failures as the authorised corporate director in managing the liquidity of the Woodford Equity Income Fund.

The regulator says it considers LFS made “critical mistakes and errors… with the result that the fund failed to have a reasonable and appropriate liquidity profile from September 2018”.

According to the FCA, the maximum £235mn redress sum comprises:

• LFS's assets of cash and capital resources of around £47mn;
• Its relevant insurance cover of up to around £48mn; and
• The sale of Link Group’s Fund Solutions business generating up to around £140mn.

The agreement by LFS to provide redress is subject to the sale being completed, as well as investors’ and court approval of a scheme of arrangement.

We will continue to push to get the full compensation that they are entitled to.Daniel Kerrigan, Harcus Parker

So as AJ Bell’s head of investment partnerships Ryan Hughes notes, there are still “further hurdles to overcome”.

“Although, given the public announcement, it must be assumed that the FCA have a strong level of confidence that the sale of the business will go through, and it would be a surprise if Woodford investors didn’t approve the deal given how long this sorry saga has dragged on for,” he says.

The saga continues

In its announcement of the redress plan, the regulator says LFS will agree to settlement of the FCA’s investigation if the sale is completed and the scheme becomes effective.

“The findings of the investigation, including an analysis of how the findings amount to breaches, will be published at that stage. This will end the FCA’s enforcement case against LFS and enable payments to investors to be made,” the regulator adds.

But although the FCA has established steps to ending its enforcement case against LFS, the Woodford fallout is not being consigned to history yet.

In its announcement, the regulator says other parties are under investigation regarding the circumstances that led to the fund’s suspension.

These investigations continue, the FCA says, and will consider any further failings that may have negatively impacted investors.

“While investors will likely be pleased to see progress from the FCA in respect of Link, the FCA has made it clear that there are other parties that remain under investigation,” says Hughes. “As a result, we can expect this to drag on for some time to come as the FCA moves onto the next phase.

“However, they were always likely to want to deal with the Link issue first,” he adds.

“Not least because as the authorised corporate director, they were legally responsible for the fund. Now they have drawn their conclusions on this element, it wouldn’t be a surprise if other aspects of the investigations now move somewhat faster.”

Besides continuing investigations, law firms have pursued claims on behalf of investors.

In February 2021 Leigh Day announced it was in a position to formally launch a claim. According to its ‘Woodford payback’ website, the law firm considers Link breached the rules of the FCA handbook and failed to properly carry out the management function of the Woodford Equity Income Fund.

Two days after the FCA’s announcement, Meriel Hodgson-Teall, a partner at Leigh Day, which is representing more than 13,000 investors in a group claim against Link, said the firm was “urgently considering this latest announcement from Link.”

Indeed, in its announcement of the redress plan, the FCA likewise cites matters giving rise to “concerns that LFS breached the FCA’s Principle 2, LFS’s obligation to carry out its activities with due skill, care and diligence, and Principle 6, LFS’s obligation to treat all customers fairly”.

We are urgently considering this latest announcement from Link.Meriel Hodgson-Teall, Leigh Day

Meanwhile Harcus Parker, a commercial litigation firm, is investigating claims against the Woodford Equity Income Fund’s depositary, Northern Trust. 

A depositary is an independent firm that holds the fund’s assets.

In a 2019 letter from the FCA’s then-chief executive Andrew Bailey to the Treasury Committee chair, he wrote: “[A depositary] has an important role to play in providing independent governance and oversight to certain decisions made by the fund manager, such as suspensions.”

Is the £235mn redress enough?

In September the regulator said that LFS could be required to pay redress of up to around £306mn, but added in April that the figure is “substantially greater” than LFS’s remaining assets.

“As a result the FCA has been in discussions with LFS’s ultimate parent, Link Group, to reduce the shortfall as much as possible,” the announcement reads.

Taking into account further payments made to investors by the Woodford Equity Income Fund, the FCA has reduced what it considers to be the appropriate redress amount up to around £298mn.

While the regulator acknowledges that the £235mn figure on offer will not provide the full amount of £298mn, the FCA says they consider it is in investors’ interests to be given the opportunity to consider the scheme. If the proposed amount of £235mn is fully paid, investors will have recovered around 77p in the pound.

The regulator adds that the scheme offers investors “substantially more” than is otherwise available from LFS alone, and more than would be achieved by any other means, given Link Group’s contribution.

It also describes the £60mn contribution by LFS’s ultimate parent as voluntary and “material”, and states that Link Group did not have any involvement in the subsidiary’s role as authorised corporate director.

But Daniel Kerrigan, senior associate at Harcus Parker, says the firm believes the proposal is a “bad deal for investors who will still lose meaningful sums of money”.

“I’m sure the investors will understandably be outraged by this offer,” Kerrigan adds. “We will continue to push to get the full compensation that they are entitled to.”

Harcus Parker, which says is representing about 6 per cent of the total shareholding, estimates its clients’ losses will be over £150mn.

AJ Bell’s Hughes likewise says the potential recovery of 77p in the pound will “probably end up satisfying nobody”.

“There will be some who think that they should be fully reimbursed for the fund losses, while others may feel that this outcome is better than they could have hoped for given the scale of the illiquid holdings in the fund,” he adds.

“I suspect the length of time it has taken will frustrate investors just as much as the recovery rate, with the process set to go well beyond the four year mark, which many will see as totally unacceptable, not least because we know there is still further to go.”

Chloe Cheung is a senior features writer at FTAdviser