Fallen-star fund manager Neil Woodford has been accused of having a "defective" understanding of risk management, though his lawyers have said this was not his responsibility.
In a warning notice issued almost five years after the collapse of his £3.7bn Woodford Equity Income fund (WEIF), the Financial Conduct Authority accused Woodford of having had “a defective and unreasonably narrow understanding of his responsibilities for managing liquidity risks”, which ultimately led to the fund’s downfall and the collapse of his firm Woodford Investment Management (WIM).
The watchdog also claimed the fund manager and his firm "failed to pay due regard" to the need to ensure a reasonable and appropriate liquidity profile for WEIF, lacked an appropriate liquidity framework itself and did not exercise adequate oversight in delegating responsibilities and interactions between the firm and Fund Solutions Limited, the administrator of the fund.
On behalf of Woodford and WIM, legal firms WilmerHale and Bryan Cave Leighton Paisner issued a statement this morning.
The law firms suggested the FCA’s case, that Woodford himself should have known that Link’s liquidity framework was deficient and that he should have challenged it, was undermined as the FCA "appeared to have sanctioned the framework and closely monitored it".
"It is striking that the FCA’s only criticisms of Neil Woodford relate to his involvement in matters relating to the fund’s liquidity framework, which was, in fact, Link’s responsibility and supervised by the depositary (the depositary is responsible for the safekeeping of the fund’s assets and for overseeing the fund’s authorised corporate director) and the FCA," the letter said.
As authorised corporate director, the legal letter also noted that Link "delegated the daily investment management responsibilities to WIM, it remained the fund manager and retained ultimate responsibility for the running of the fund".
It suggested that WIM only managed the fund "in accordance with both the liquidity framework and all the other portfolio constraints set by Link", noting that responsibility for liquidity rested with Link, as had been acknowledged by FCA chief executive at the time (Andrew Bailey, now Bank of England governor).
The lawyers said WIM staff had been told by Link that it and the FCA "knew the details of the liquidity framework that was being applied to the fund, including its parameters, throughout the period" and that the FCA had been monitoring the fund’s liquidity since the beginning of 2018, a year when the fund manager battled to balance liquidity amid growing investor withdrawals and concerns about the large proportion of the portfolio invested in unlisted securities.
"The team at WIM, including Mr Woodford, having not had any prior warning, were surprised by Link’s decision to suspend the fund, only being informed on the morning of the suspension," the letter said, adding that the team "were shocked by Link’s damaging decision to liquidate the fund, and that Link took responsibility for the management of that process, as well as the losses that investors suffered as a result".
WIM and Woodford disagree with the FCA’s findings, the letter said, seeing them as "fundamentally misconceived" and, as the hiring of lawyers indicates, are planning to challenge them.
In February, a High Court judge approved a redress scheme by Link for investors in the collapsed WEIF, meaning they will share £230 million, which was paid at the end of last month.
The FCA backed the redress scheme as the "best way" for investors to get their money back, even though many investors said alternatives to the scheme could enable some investors to recover more.
An FCA investigation found that LFSL, which is owned by Australia's Link Group, had made "critical mistakes and errors" in its management of the Woodford funds that resulted in them failing to have enough liquidity from September 2018.