FCA: Woodford fund investors in line for compensation

Over 300,000 of investors who lost money after investing in collapsed funds managed by Neil Woodford could finally be in line for the long awaited compensation.

Following an investigation by the City watchdog, investors trapped in the LF Woodford Equity Income Fund (WEIF) will finally be compensated for their losses.

The Financial Conduct Authority (FCA) said the payout will be approximately £235m to cover losses to investors as a result of the failures by Link Fund Solutions, which provided fund administration services. The compensation equates to around 77p in every pound invested in the fund.

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David Ricketts, author of When the Fund Stops, said: “It's taken almost four years to reach this point, but the FCA's announcement is one that more than 300,000 investors trapped in Woodford's fund have been waiting for.

Ricketts, who is also asset management correspondent at Financial News, added that this will not however draw a line under the Woodford scandal.

“Investors, creditors and the courts still need to approve the redress scheme, and the sale of Link Fund Solutions to Waystone Group also needs to be completed.

“If the scheme fails to get the green light, the FCA has said it will pursue enforcement action against Link Fund Solutions - a move that will likely be contested by Link and which could lead to months of further uncertainty for investors.”

According to the FCA, LFS had a responsibility to ensure the WEIF operated with appropriate liquidity risk management and controls and investors were treated fairly. But the FCA concluded there “were critical mistakes and errors in managing the fund’s liquidity and that by November 2018, LFS’s failure meant WEIF investors leaving the fund from that point onwards benefited disproportionately from access to the most liquid assets in the fund that were sold”.

Therese Chambers, executive director of Enforcement and Market Oversight at the FCA, commented: ”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.”

Investors will soon receive a letter now about the proposal.

Who was Neil Woodford?

A star fund manager, Neil Woodford was no stranger among investors who poured thousands into his funds; at peak, the fund was managing around £10bn.

His fund also appeared in the most popular buy lists that a number of platforms provide to their customers to help them make fund picks. A large number of these investors came via Hargreaves Lansdown.

While Woodford built a reputation by making sensible decisions that helped his funds dodge the dot.com bubble bust-up and financial crisis, in the mid-2010s, Woodford started to invest increasingly large amounts in illiquid private businesses. This caused a problem when investors started to withdraw their cash - the funds couldn’t sell the holdings fast enough.

As a result, redemptions were suspended in June 2019, leaving LFS and other parties to sort out the mess.

You could say the high risk is the very nature of active fund management, and quite possibly something that can easily happen again as investors are often drawn towards star fund managers, but Woodford’s decisions were risky and left the fund unbalanced and risky.

Investors today are of course wary of celebrity status fund managers and we have seen in recent years that passive funds are now more popular than ever - but some popular funds such as the FundSmith Equity and Scottish Mortgage Investment Trust still continue to be popular despite recording significant losses.