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Former star fund manager Neil Woodford had a “defective” understanding of his responsibilities in the run-up to the collapse of his £3.7bn Equity Income Fund, the UK financial regulator said in its first public findings after a long-running probe.
The Financial Conduct Authority said on Thursday that Woodford’s “unreasonably narrow understanding of his responsibilities for managing liquidity risks” ultimately led to the fund’s downfall in 2019. The collapse of his company, which trapped roughly 300,000 investors, left them nursing losses in one of the UK’s biggest investment scandals.
The regulator also found that his firm, Woodford Investment Management, failed in its oversight of the fund’s liquidity — how easily assets in the fund could be turned into cash for investors to withdraw at short notice.
The FCA findings — which are preliminary and are being challenged by Woodford and WIM — come five years after Woodford’s fund was suspended and closed, which at its peak managed more than £10bn. Woodford, who made his name as one of the UK’s most popular retail investment managers at Invesco, came unstuck following a series of poor stock picks and problems selling holdings in small and unquoted companies. Many investors are still awaiting redress.
The FCA did not set out what action it could take against Woodford or the firm, but it has the ability to issue fines and bans.
“WIM and Mr Woodford disagree with the FCA’s findings, which they believe are unprecedented and fundamentally misconceived,” said WilmerHale, the law firm representing them.
Meanwhile, the FCA on Thursday also found that Woodford’s fund administrator, Link Fund Solutions, “failed to act with due skill, care and diligence”. The FCA added that it also “failed to manage the liquidity of the fund” between July 2018 and June 2019 when trading halted, according to the watchdog’s final report.
“Link Fund Solutions’ job was to properly manage the Woodford Equity Income Fund and to protect investors’ interests,” said Therese Chambers, joint executive director of enforcement and market oversight at the FCA. “Their failings led to losses for those trapped in the fund when it was suspended.”
The watchdog added that Woodford and his firm’s shortcomings “materially increased the risk that the [fund] would need to be suspended”, putting investors who stayed put “at a disadvantage”.
LFS agreed to settle the enforcement case brought by the FCA and provide redress to affected investors, who are starting to receive a share of a previously agreed compensation scheme worth up to £230mn.
This meant LFS avoided a £50mn fine. The FCA said it decided against imposing a reduced penalty as this would have shrunk the pot available for investors seeking redress.
LFS said in a statement that it agreed the settlement with the FCA “on the basis that there is no admission of liability”. It said if the redress scheme had not been approved, it would have “challenged the FCA’s findings and defended itself against any claims made against it by scheme investors”.
WilmerHale said in its statement for Woodford and the firm: “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.”
