The former star stockpicker Neil Woodford has been hit with a warning notice by the Financial Conduct Authority over the spectacular collapse of his fund five years ago, with the watchdog accusing him of having “defective understanding” of liquidity risks faced by the fund.
In the warning issued on Thursday, the FCA said it intended to take action against Woodford and Woodford Investment Management (WIM) in respect of their conduct in the management of the Woodford Equity Income Fund (WEIF) before its suspension in 2019.
The FCA said Woodford held “a defective and unreasonably narrow understanding of his responsibilities for managing the WEIF’s liquidity risks”, while also claiming that he had failed to ensure the company had appropriate liquidity when making investment decisions.
Lawyers representing Woodford and the firm rejected the findings, which they called “unprecedented and fundamentally misconceived”.
Woodford was forced to collapse the £3.7bn fund in June 2019, with almost 300,000 investors affected. The fund was launched by Woodford in 2014 after a successful career working as a fund manager at Invesco.
However, after his initial success earned him the moniker of “Britain’s Warren Buffett”, a number of unsuccessful investments resulted in many investors withdrawing cash, prompting a liquidity crisis.
In the notice, the FCA said the investment decisions made by Woodford and WIM materially increased the risk of and resulted in the WEIF’s liquidity profile “becoming unreasonable and inappropriate”.
It added: “They also materially increased the risk that the WEIF would need to be suspended and thereby place those investors who did not redeem prior to the point of suspension at a disadvantage.”
In a separate final notice to Link Fund Solutions (LFS), the company in charge of the fund’s liquidity, the FCA said it “failed to act with due skill, care and diligence in its management”. It also stated that it failed to manage the liquidity of the fund and ensure that concerns about the liquidity position were acted upon.
In September 2022, the FCA said it could fine Link £50m because of its role in the collapse of the fund. However, the watchdog revealed in the final notice that it would not be pursuing the fine as this would reduce the amount out of pocket investors could receive back.
In February, the high court gave the green light for a £230m redress scheme, with those who invested in the fund when it was suspended to receive a share.
The warning notice marks the FCA’s intention to take action but Woodford will be able to make representations to its regulatory decisions committee before it decides what action to take. Woodford’s lawyers have said he will challenge the FCA decision.
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A statement issued on behalf of WilmerHale and BCLP, legal counsel to Woodford and WIM, said: “The FCA alleges that WIM and Mr Woodford failed to act with due skill, care and diligence during the 11 months from 31 July 2018 to 3 June 2019, when Link decided to suspend the fund.
“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.”
A spokesperson from LFS said: “As we have previously stated, LFSL [Link Fund Solutions Limited] entered into a conditional settlement agreement with the FCA and Link Group expressly on the basis that there is no admission of liability. If the scheme had not been approved, LFSL would have challenged the FCA’s findings and defended itself against any claims made against it by scheme investors.
“We are pleased the scheme has become effective and the initial payment has now been made to scheme investors. We have always believed the scheme was the best option to provide investors with a substantial level of redress.”
