Following an investigation by the FCA, Link Fund Solutions (LFS) has agreed to provide, with a material contribution from its ultimate parent, Link Administration Holdings (Link Group), a significant redress payment to investors in the LF Woodford Equity Income Fund (the WEIF) of up to approximately £235 million.

The redress is to cover losses to over 300,000 investors in the WEIF as a result of failures by LFS, as the authorised corporate director (ACD) of the WEIF, in managing the liquidity of the fund. 

The agreement is subject to completion of a sale of the Link Group’s Fund Solutions business, which includes LFS's business and other additional assets by Link Group, to the Waystone Group (Waystone) and the approval by the investors and the Court of a scheme of arrangement to resolve all LFS’s liabilities relating to the WEIF (Scheme). The sale and its terms and conditions are set out more fully in Link Group’s announcement to the Australian Stock Exchange dated 20 April 2023.

The up to £235 million in redress includes LFS’s assets (cash, capital resource and potential insurance proceeds), plus the proceeds from the sale of Link Group’s Fund Solutions business.  

LFS has a net balance of cash and capital resources of approximately £47 million. It also holds relevant insurance cover of up to approximately £48 million and discussions with its insurers are ongoing.

The sale of Link Group’s Fund Solutions business will generate up to approximately £140 million in sale proceeds. The FCA has received appropriate information from Waystone and assurances from LFS and Link Group regarding how they have confirmed that the consideration represents fair value for these assets. This includes up to approximately £80 million in net proceeds from selling LFS’s business, together with a contribution of up to approximately £60 million from the sale by Link Group of the rest of its Fund Solutions business. 

The FCA’s investigation found that, as ACD, LFS had responsibility for ensuring the WEIF operated with appropriate liquidity risk management and controls, and that all investors in the fund were treated fairly. The FCA considers LFS made critical mistakes and errors in managing WEIF’s liquidity with the result that the fund failed to have a reasonable and appropriate liquidity profile from September 2018.  

By 1 November 2018, LFS’s failure to have properly measured the liquidity of the WEIF meant that investors leaving the fund from that point onwards benefited disproportionately from access to the most liquid assets in the fund which were sold. The FCA considers that those investors who continued to hold investments in the WEIF at the time of its suspension were treated unfairly because this left them with a disproportionate share of the remaining assets which were more illiquid.  

These matters give rise to concerns that LFS breached the FCA’s Principle 2, LFS’s obligation to carry out its activities with due skill, care and diligence, and Principle 6, LFS’s obligation to treat all customers fairly.

A full account of the FCA’s concerns will be included in the Scheme documentation which will be sent to investors and creditors before they are asked to vote on the Scheme.

The FCA originally calculated the losses arising from failures in liquidity management to remaining investors as being up to approximately £306 million, which is substantially greater than the remaining assets of LFS.  As a result the FCA has been in discussions with LFS’s ultimate parent, Link Group, to reduce the shortfall as much as possible.  Those discussions have led to today’s announcement.

The contribution by Link Group is a voluntary one. Link Group considers that it has no legal responsibility for the obligations of LFS including losses caused to investors in the WEIF.  Moreover, the FCA investigation into the circumstances leading up to the suspension of the WEIF, has made no adverse findings in relation to and did not raise concerns about Link Group. Link Group did not have any involvement in LFS’s role as ACD of the WEIF. The FCA acknowledges the cooperation of Link Group and LFS throughout the enforcement process, and in particular, in the voluntary contribution by Link Group.

The contribution of the Link Group is dependent on the approval of the Scheme by the WEIF investors entitled to redress and other WEIF related creditors of LFS (if any) covered by the Scheme. The Scheme will also require court approval.  

If the sale is completed and the Scheme becomes effective, LFS will agree to settlement of the FCA’s investigation. The findings of the investigation including an analysis of how the findings amount to breaches will be published at that stage. This will end the FCA’s enforcement case against LFS and enable payments to investors to be made. If the Scheme is not approved, the FCA will proceed with its enforcement case against LFS, which LFS has indicated will be fully contested. The FCA’s case includes a proposed financial penalty of £50 million which the FCA would not enforce if the Scheme is approved given that all of LFS’s funds, as well as the contribution from Link Group from the sale of the other assets to Waystone, will be used to pay the redress liability and creditors of LFS.  

If the Scheme is not approved, Link Group has indicated it will not make the redress contribution, which would mean any redress would be dependent on the outcome of a contested case between the FCA and LFS and any redress would be limited to the net assets of LFS, less litigation and any other costs.  

Since its announcement about redress on 21 September 2022 the FCA has recalculated the total redress 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 £298 million. 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.

Although the redress offered in the proposed Scheme will not provide fund investors with the full redress amount of £298 million, 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 £235 million 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 redress offered in the proposed Scheme does not cover investment losses which may have come as a result of any poor financial performance of the investments held by the fund. Instead it covers the losses that flowed from LFS’s conduct which we consider fell below the required standards. If approved, the Scheme offers investors substantially more than is otherwise available from LFS alone and more than would be achieved by any other means, given the contribution by Link Group.  

Therese Chambers, Executive Director of Enforcement and Market Oversight at the FCA, commented: 

‘The FCA’s investigation raised serious concerns about Link Fund Solutions’ management of the liquidity of the Woodford Equity Income Fund. 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.’

There are other parties under investigation in relation to the circumstances that led to the suspension of the LF Woodford Equity Income Fund. These investigations continue and they will consider any further failings which may have negatively impacted investors.