"We believe the proposed scheme offers investors the best chance to obtain a better outcome than might be achieved by any other means"
The FCA has announced that Link Fund Solutions (LFS) has agreed to provide £235m in redress payments to investors in the Woodford Equity Income Fund (the WEIF).
Over 300,000 investors were affected by the equity fund’s collapse three years ago. The redress will cover losses to the investors as a result of failures by LFS, as the administrator, in managing the liquidity of the fund.
The £235 million in redress includes LFS’s assets, plus the proceeds from the sale of Link Group’s Fund Solutions business.
What did the FCA's investigation find?
The FCA’s investigation found that, as authorised corporate director, LFS had responsibility for ensuring the WEIF operated with appropriate liquidity risk management and controls, and that all investors in the fund were treated fairly. The FCA considers LFS made critical mistakes and errors in managing WEIF’s liquidity with the result that the fund failed to have a "reasonable and appropriate liquidity profile" from September 2018.
By 1 November 2018, LFS’s failure to have properly measured the liquidity of the WEIF meant that investors leaving the fund from that point onwards benefited disproportionately from access to the most liquid assets in the fund which were sold. The FCA considers that those investors who continued to hold investments in the WEIF at the time of its suspension were treated unfairly because this left them with a disproportionate share of the remaining assets which were more illiquid.
The FCA originally calculated the losses arising from failures in liquidity management to remaining investors as being up to approximately £306 million, which is substantially greater than the remaining assets of LFS. As a result the FCA has been in discussions with LFS’s ultimate parent, Link Group, to reduce the shortfall as much as possible.
How will the redress scheme work?
The contribution by Link Group is a voluntary one, as it considers that it has no legal responsibility for the obligations of LFS including losses caused to investors in the WEIF.
Moreover, the FCA investigation into the circumstances leading up to the suspension of the WEIF did not raise concerns about Link Group as it did not have any involvement in LFS’s role as director of the WEIF. The FCA says it "acknowledges the cooperation of Link Group and LFS throughout the enforcement process, and in particular, in the voluntary contribution by Link Group".
The contribution of the Link Group is dependent on the approval of the scheme by the WEIF investors entitled to redress and other WEIF related creditors of LFS (if any) covered by the Scheme. The Scheme will also require court approval.
If the sale is completed and the scheme becomes effective, this will end the FCA’s enforcement case against LFS and enable payments to investors to be made. If the scheme is not approved, the FCA will proceed with its enforcement case against LFS, which LFS has indicated will be fully contested.
If the scheme is not approved, Link Group has indicated it will not make the redress contribution, which would mean any redress would be dependent on the outcome of a contested case between the FCA and LFS and any redress would be limited to the net assets of LFS, less litigation and any other costs.
If the proposed redress amount of £235 million is paid in full then investors will have recovered approximately 77p in the pound. There has already been a total of £2.56bn paid to investors since the suspension of the Fund from the distribution of proceeds from the sale of investments.
The redress offered in the proposed scheme does not cover investment losses which may have come as a result of any poor financial performance of the investments held by the fund. Instead it covers the losses that flowed from LFS’s conduct. The FCA says that if approved, the scheme offers investors "substantially more than is otherwise available from LFS alone and more than would be achieved by any other means, given the contribution by Link Group".
Therese Chambers, executive director of enforcement and market oversight at the FCA, commented: "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."
