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Failed Woodford investors set for £235m compensation…but there are hurdles to overcome

Paloma Kubiak
Written By:
Paloma Kubiak

Nearly four years after the Woodford saga unfolded, investors are set for redress in the region of £235m, lower than initial expectations. It’s also conditional on two criteria being met.

Link Fund Solutions (LFS) has agreed to pay a “significant redress payment” of £235m to more than 300,000 investors in the LF Woodford Equity Income Fund (WEIF).

It follows an investigation by the city watchdog, the Financial Conduct Authority (FCA) of LFS – the administrator behind the failed Woodford fund run by disgraced Neil Woodford (pictured), who was once a star manager.

This figure relates to LFS’s failings in managing the liquidity of the WEIF and its conduct “which fell below the required standards”, the FCA confirmed. It doesn’t cover poor returns from money held in the investments.

However, the £235m redress figure will only materialise when two conditions are met:

  • The sale of Link Group’s Fund Solutions business (including subsidiary LFS and other assets) to asset management service firm Waystone Group.
  • Investor and High Court sanction (approval) of a ‘scheme of arrangement’.

The FCA said if the sale completes and the scheme becomes effective, LFS will agree to settlement of the FCA’s investigation, with its findings of the breaches to be published in full at that time.

“This will end the FCA’s enforcement case against LFS and enable payments to investors to be made,” a statement read. This redress will be paid to those who were invested in the WEIF at the time of its suspension in June 2019.

If the scheme isn’t approved, the FCA will go ahead with its enforcement case against LFS, which LFS has indicated “will be fully contested”, and it will also not make the voluntary redress contribution in this scenario (£60m – part of the cash from the sale proceeds). This would mean any redress would be dependent on the outcome of a contested case between the FCA and LFS, with any redress limited to the net assets of LFS, less litigation and any other costs.

Lesser redress amount

Investors may recall that the FCA initially indicated a redress scheme at a higher £306m, plus a £50m penalty for LFS over its failings.

The FCA explained this was an original calculation from losses arising from the failings. But a recalculated total has been made to take into account further payments made to investors by the WEIF.

“This has reduced what the FCA considers to be the appropriate redress amount up to approximately £298m. It is expressed as ‘up to’ because it is possible the amount may reduce if investors receive further distributions as a result of the remaining assets in the WEIF being sold,” the FCA said.

It added that although the redress offered in the proposed scheme will not provide fund investors with the full redress amount of £298m, “the FCA considers it is in the interests of the investors to be given the opportunity to consider the scheme. If the proposed redress amount of £235m is paid in full then investors will have recovered approximately 77p in the pound. There has already been a total of £2.56bn paid to investors since the suspension of the fund from the distribution of proceeds from the sale of investments”.

The £235m figure includes an estimated £140m from the sale proceeds, together with LFS’ net balance of cash and capital resources of approximately £47m, and insurance cover up to £48m.

What now for trapped Woodford investors?

There’s more waiting for starters, though the FCA said it continues to work with LFS on the details of the scheme.

“Subject to the progress of completion of the sale of Link’s Fund Solutions business, we currently expect to provide an update in July 2023, with scheme documentation becoming available as early as possible in the fourth quarter of 2023. We will continue to update on progress,” a statement read.

The FCA said the final redress figure will be based on investors voting to approve the scheme which it said “maximises the available redress and is the fastest way for it to be paid”.

It explained that the ‘scheme of arrangement’ is a process used by a company to reach a binding agreement with creditors to pay back all, or part, of the money it owes them over an agreed timeline.

Meanwhile, in an update to investors today, Link Group confirmed it continues to wind up the fund “in a manner and at a pace which seeks to achieve the best outcome for investors”.

Further, details of the scheme and any further action required by investors “will be set out in due course”.

It added: “As part of the settlement, the FCA has confirmed its intention to support the scheme and intends to support its approval by WEIF investors.”

Karl Midi, managing director of LFS, wrote: “We have entered into the settlement expressly on the basis that there is no admission of liability and our rights in respect of the settlement are expressly and entirely reserved unless and until the scheme becomes fully effective. We believe the settlement and the related Scheme to be in the best interests of investors in the fund.”

Separately, group action claims are in the works by three legal firms: Harcus Parker, Leigh Day and RGL Group.

Meriel Hodgson-Teall, partner at law firm Leigh Day which is representing over 13,000 investors in a group claim against Link, said it is urgently considering this latest announcement.

One step closer to closure

Experts and analysts agree that investors should approve the scheme and the sale is likely to go through.

Jason Hollands, managing director of Bestinvest, said: “It would be inconceivable that this is not approved, as the redress set out is greater than the value of Link Fund Solutions and therefore LFS would almost certainly contest the enforcement in the absence of the settlement being supported.”

Ryan Hughes, AJ Bell head of investment partnerships, said today’s announcement will come as a “significant relief” for investors who have been “patiently waiting” for some form of compensation, though after nearly four years, “there are still further hurdles to overcome”.

Hughes said: “Although, given the public announcement, it must be assumed the FCA have a strong level of confidence that the sale of the business will go through, and it would be a surprise if Woodford investors didn’t approve the deal given how long this sorry saga has dragged on for.

“The scale of the financial redress is evident given that it effectively wipes out the UK Fund Solutions business.

“While approval of this redress scheme with Link would close the case and liabilities against them, the FCA points out that this remains a live investigation with other parties remaining under investigation. As a result, the Woodford drama will drag on past the four-year mark but many investors will no doubt be glad that significant progress now looks to have been made. While it will take some time for this redress process to complete and for payments to be made, investors are one step closer to being able to finally put this whole sorry episode to bed.”

Related: See Woodford saga three years on for more details of the downfall of the star manager and how investors become trapped in the £3bn fund.