Woodford investors to share £235m compensation payment

About 300,000 investors who lost out when Neil Woodford’s investment fund started to unravel are set to be paid compensation of up to £235 million from the fund’s administrator after a deal with the City watchdog.

The Financial Conduct Authority (FCA) said that Link Fund Solutions (LFS) had made “critical mistakes and errors” in how it managed the Woodford Equity Income Fund (WEIF).

As a result investors lost about £298 million when the fund entered difficulties, the FCA said.

The fund run by Mr Woodford – once seen as a star in the City of London – ran into problems in 2019.

The investor had placed a lot of bets on companies whose shares were not traded on a public stock exchange.

These kinds of investments are hard to sell – in financial speak, they have low liquidity – so when some investors in the fund started to take their money out, Mr Woodford struggled to meet these demands.

The FCA said that Link Fund Solutions was responsible for ensuring that the fund appropriately managed its liquidity and that all investors 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,” the watchdog said.

This meant that, from the start of November that year, investors who sold their holdings ended up getting first dibs on the money raised from the sale of the more liquid investments.

Those who stayed with the fund were left with an even more illiquid investment and lost out to the tune of £298 million as a result, the FCA said.

“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,” it said.

When the fund finally got wound up, LFS started to sell off these illiquid assets. It took years, and it managed to raise billions of pounds, but there was still a shortfall.

LFS owner, Link Group, will raise the money to pay redress to these customers by selling a business unit for £140 million. It will also use £47 million from LFS’s balance sheet and might be able to raise up to £48 million from its insurance.

If the amount is paid in full, it will mean that investors recoup 77p in the pound from their losses.

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.”

“There are other parties under investigation in relation to the circumstances that led to the suspension of the LF Woodford Equity Income Fund.

“These investigations continue and they will consider any further failings which may have negatively impacted.”