FCA Announces Plan To Deliver Redress To Woodford Investors
Summary of Development
Following an investigation by the FCA, Link Fund Solutions (LFS) has agreed to provide, with a material contribution from its ultimate parent, Link Administration Holdings (Link Group), a significant redress payment to investors in the LF Woodford Equity Income Fund (the WEIF) of up to approximately £235 million. The redress is to cover losses to over 300,000 investors in the WEIF as a result of failures by LFS, as the authorised corporate director (ACD) of the WEIF, in managing the liquidity of the fund.
The agreement is subject to completion of a sale of the Link Group’s Fund Solutions business, which includes LFS's business and other additional assets by Link Group, to the Waystone Group (Waystone) and the approval by the investors and the Court of a scheme of arrangement to resolve all LFS’s liabilities relating to the WEIF (Scheme). The sale and its terms and conditions are set out more fully in Link Group’s announcement to the Australian Stock Exchange dated 20 April 2023.
The up to £235 million in redress includes LFS’s assets (cash, capital resource, and potential insurance proceeds), plus the proceeds from the sale of Link Group’s Fund Solutions business.
LFS has a net balance of cash and capital resources of approximately £47 million. It also holds relevant insurance cover of up to approximately £48 million and discussions with its insurers are ongoing.
The sale of Link Group’s Fund Solutions business will generate up to approximately £140 million in sale proceeds. The FCA has received appropriate information from Waystone and assurances from LFS and Link Group regarding how they have confirmed that the consideration represents fair value for these assets. This includes up to approximately £80 million in net proceeds from selling LFS’s business, together with a contribution of up to approximately £60 million from the sale by Link Group of the rest of its Fund Solutions business.
The FCA’s investigation found that, as ACD, 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.
These matters give 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.