UK financial watchdog, the Financial Conduct Authority (FCA) has issued a warning notice to Link Fund Solutions (LFS), which gives it 14 days to respond to a fine of £50mln over its role in the collapse of the Woodford Equity Income fund.
This would be on top of up to £306mln of compensation for investors that the FCA said last week that LFS should pay.
On Wednesday the FSA confirmed that it had issued LFS, a subsidiary of Australia’s Link Group, with a draft warning notice following its investigation into the downfall of the Woodford fund.
Calculating the figure of £306mln potential redress, the FCA said this was based on its “current view of LFS's failings in managing the liquidity of the WEIF."
"It does not reflect any amount which may be owed to anyone else, including members of the fund, as a result of potential wrongdoing by other parties," the FCA added.
The watchdog noted that the redress it determines is “based on misconduct rather than losses caused by fluctuations in the market value or price of investments”.
LFS said it was considering “all options”, including settlement talks with the regulator, which could result in a discount to the fine, or challenging the warning notice.
Its parent Link said last week that it “did not agree with” the FCA's findings and would not fund fines or compensation from the wider group.
What Link is meant to have done wrong
The redress reflects the FCA’s view that LFS was responsible for "misconduct" and "failings" in managing the liquidity of the former Woodford Equity Income fund, which was at one point the most popular investment in Britain with a peak value of around £10bn.
As authorised corporate director of the fund, LFS was responsible for approving the valuations put on the fund’s investments as well as overseeing its governance.
However, it did not stop star stockpicker Neil Woodford from investing a sizeable portion of the fund in illiquid, hard-to-sell assets.
It eventually shuttered the fund in June 2019 due to an “increased level of redemptions”, after investor worries about its performance had led to ever more withdrawals.
Not only did the fund manager struggle to sell these assets in order to keep up with redemptions, but since the collapse of the fund, LFS has continued to struggle and the value of the remaining assets has wilted amid the winding-down process.
Since gating the £3.7bn fund, four capital distributions have been made to investors totalling £2.54bn, but LFS has paid out nothing since December 2020 and overseen losses of over £870mln.
Roughly £109mln of assets remain, according to the latest valuation.
Link has been taken to court by investors over the fund's collapse, with law firms Leigh Day and Harcus Parker joining forces over a claim that LFS was in breach of FCA rules in the way it managed the fund and that this ultimately led to its collapse.
The claim is being made on behalf of the estimated 270,000 that were locked into the fund when redemptions were frozen.
Further investigations are continuing elsewhere, with the FCA saying that LFS is one of multiple parties under investigation.
Link has been involved in other high-profile scandals, including over the Arch Cru fund in 2009, when Link was called Capita Financial Managers.
As with Woodford, Capita Financial Managers was authorised corporate director when Arch Cru funds were suspended on the grounds of “insufficient liquidity to meet anticipated redemption requests”. Capita Financial Managers paid £32mln to investors as part of a settlement in 2012.