The FCA has today issued warning notices to both Woodford Investment Management (WIM) and Neil Woodford, proposing to take action against them for their conduct in the management of the Woodford Equity Income Fund (WEIF). Warning notices indicate that the FCA proposes to take enforcement action against individuals or firms.
Over 300,000 investors were affected by the equity fund’s collapse four years ago.
The regulator's latest announcement adds that it found Link Fund Solutions (LFS) failed to act with due skill, care and diligence in its management of the WEIF.
The FCA found that between 31st July 2018 and the fund's suspension on 3rd June 2019, LFS failed to manage the liquidity of the fund - or how easily assets in the fund could be turned into cash - so that investors could access their money at short notice.
It says LFS also failed to properly oversee Woodford Investment Management or to sufficiently ensure that concerns about liquidity were acted on.
The FCA has published a warning notice statement about its proposed action against Mr Woodford and WIM. This includes the FCA's allegations that Mr Woodford had a defective and unreasonably narrow understanding of his responsibilities for managing liquidity risks. It also alleges that he and WIM failed to ensure that the WEIF's liquidity risk framework was appropriate, to respond appropriately to the ongoing deterioration in the fund's liquidity, and to maintain a reasonable liquidity profile for the WEIF.
Both parties now have the right to make representations to the Regulatory Decisions Committee.
Those invested in the WEIF when it was suspended are starting to receive a share of the up to £230 million redress scheme, which was approved by the High Court in February.
The FCA would have imposed a fine of £50m on LFS (which would have been reduced to £35m in the case of settlement). However, imposing this penalty would reduce the amount which consumers receive back.
The FCA has also confirmed that there are no other parties under investigation in relation to the Woodford Equity Income Fund.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, said: "Link Fund Solutions' job was to properly manage the Woodford Equity Income Fund and to protect investors' interests. Their failings led to losses for those trapped in the fund when it was suspended.
"It is right that they compensate investors for the losses that resulted from their failings, and we're pleased that the scheme has started making payments."
WilmerHale and BCLP, legal counsel to Woodford Investment Management and Neil Woodford, commented: "Today, the FCA announced that it has initiated regulatory enforcement action against both Woodford Investment Management (WIM) and Mr Woodford. This announcement comes nearly five years after the investigation commenced.
"The FCA alleges that WIM and Mr Woodford failed to act with due skill, care and diligence during the 11 months from 31 July 2018 to 3 June 2019, when Link decided to suspend the Fund.
"It is striking that the FCA’s only criticisms of Neil Woodford relate to his involvement in matters relating to the Fund's liquidity framework, which was, in fact, Link's responsibility and supervised by the Depositary (the Depositary is responsible for the safekeeping of the Fund’s assets and for overseeing the Fund’s Authorised Corporate Director) and the FCA.
"Even though, as Authorised Corporate Director, Link delegated the daily investment management responsibilities to WIM, it remained the Fund Manager and retained ultimate responsibility for the running of the Fund. As the delegated Investment Manager, WIM was required to manage the Fund in accordance with both the liquidity framework and all the other portfolio constraints set by Link.
"Central to the failings alleged against WIM and Mr Woodford is the FCA’s claim that the framework used to measure and monitor the Fund’s liquidity risk and the corresponding parameters of the Fund’s liquidity were not appropriate.
"Importantly, that framework and its parameters were set by Link, one of the most experienced Authorised Corporate Directors in the industry. At the time, Link managed fund assets for over 100 investment managers. As acknowledged by Andrew Bailey shortly after the Fund’s suspension, responsibility for liquidity rested with Link.
"Additionally, staff at WIM had it confirmed by Link that the FCA and the Depositary knew the details of the liquidity framework that was being applied to the Fund, including its parameters, throughout the period. In fact, WIM knew that the FCA had been monitoring the Fund’s liquidity continuously since the beginning of 2018. The oversight and investment functions at WIM all understood that the framework’s parameters, set by Link, overseen by the Depositary and known to and monitored by the FCA, represented the acceptable liquidity profile of the Fund.
"The team at WIM, including Mr Woodford, having not had any prior warning, were surprised by Link’s decision to suspend the Fund, only being informed on the morning of the suspension. Subsequently, the entire WIM team were shocked by Link’s damaging decision to liquidate the Fund, and that Link took responsibility for the management of that process, as well as the losses that investors suffered as a result.
"However, the FCA’s case is that Neil Woodford should have known that Link’s liquidity framework was deficient and that he should have challenged it, even though the FCA appeared to have sanctioned the framework and closely monitored it.
"WIM and Mr Woodford disagree with the FCA’s findings, which they believe are unprecedented and fundamentally misconceived. The findings will be challenged by WIM and Mr Woodford."
