The FCA logo at the headquarters in London
The agreement with the FCA is subject to the completion of a sale of Link Fund Solutions to rival company Waystone Group © Toby Melville/Reuters

Investors trapped in former star stockpicker Neil Woodford’s flagship fund have been offered up to £235mn in compensation after an investigation by regulators into one of the UK fund management industry’s biggest scandals.

The Financial Conduct Authority set out the compensation plan after finding that Link Fund Solutions, which was the administrator for Woodford’s £3.7bn Equity Income Fund, made “critical errors and mistakes” that hastened the fund’s demise.

The Equity Income Fund was plunged into crisis in 2019 after several of its investments tumbled in value, prompting a wave of investor redemptions that it struggled to meet. In its role as administrator, LFS froze the fund in June that year.

Errors in the administration of the fund, which also held stakes in illiquid private companies, had left it without the cash buffers necessary to meet redemption requests as early as September 2018, the FCA said on Thursday.

“The FCA’s investigation raised serious concerns about Link Fund Solutions’ management of the liquidity of the Woodford Equity Income Fund,” said Therese Chambers, executive director of enforcement and market oversight at the FCA. “LFS’s actions appear to have caused significant losses for those investors who remained in the fund when it was suspended.”

Woodford’s fund was overwhelmed by the redemptions in part because a portion of its investments were tied up in shares of private companies that proved hard to sell quickly. Before LFS froze the fund, it had already at least twice breached a limit that restricted unlisted securities to 10 per cent of its assets.

The proposed compensation plan, which will need court approval, ends an almost four-year wait for the more than 300,000 investors whose money was frozen.

About £2.56bn has already been returned to investors from the sale of assets in the frozen fund.

Ryan Hughes, head of investment partnerships at AJ Bell, said the compensation offer “will come as significant relief for the thousands of investors who have been very patiently waiting for some form of compensation”.

But Mark Bishop of the Transparency Task Force, a group that has campaigned for Woodford investors, described the plan as an “insult” because it “doesn’t explain how most of the investors’ losses will be remedied”.

The UK regulator said LFS would receive a “material contribution” from its Australian parent Link Group towards the cost of the compensation plan. The contribution is dependent on Link selling LFS to rival Waystone Group, a deal that has been hit by delays, but was announced by Link earlier on Thursday.

Link Group chief executive Vivek Bhatia said: “The sale of LFS significantly completes our simplification strategy including a conditional settlement with the FCA.”

Woodford investors should recover about 77p in the pound under the plan, the FCA said.

The regulator had originally proposed a payout of £306mn but said this was “substantially greater” than the value of LFS’s remaining assets.

If the plan is approved, it will mark the end of the FCA’s investigation into LFS. If not, the regulator said it would take enforcement action against LFS, including a fine of £50mn.

The FCA said its probe into “other parties” involved in the failure of the fund was ongoing.

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