The Financial Conduct Authority has been accused of lacking bite as it fails to hold anyone to account for the implosion of Neil Woodford’s flagship fund one year on.
The suspension of the Woodford Equity Income fund last June, which trapped hundreds of thousands of investors, sparked the flameout of one of the UK’s biggest star managers and embroiled the industry in one of its worst scandal’s since the financial crisis.
But despite the FCA launching an investigation weeks after the then £3.7bn fund was shut, one year on no there have been little to no repercussions for the blow-up of one of the UK’s most marketed funds.
Link Fund Solutions, the fund’s authorised corporate director, that had been tasked with monitoring the fund and keeping tabs on the level of unquoted holdings, has not been penalised.
Woodford himself had already been plotting his return to fund management, seeking out opportunities in China in December, two months after his boutique folded and in March trying to woo institutional investors for a new business venture that involved buying back a handful of his unquoted investments still stuck in Woodford Equity Income.
Hargreaves Lansdown, which drew ire for its championing of Woodford’s funds on its Wealth 50 best buy list, has been threatened with potential class actions by four separate law firms. But this has failed to dent client numbers or inflows even during the coronavirus pandemic.
FCA is ‘moving with the alacrity of a superannuated snail’
“Sadly, a year on there’s not really a lot to say because the key questions everyone had a year ago have yet to be answered,” says Candid Financial Advice director Justin Modray.
Chief among them are why Link and the FCA didn’t spot the fund’s liquidity issues sooner and why Woodford Investment Management’s own internal controls didn’t prevent the fund from getting into trouble.
“The FCA is, as usual, moving with the alacrity of a superannuated snail,” says CW Research managing director Clive Waller.
City Hive Founder and CEO Bev Shah says by not holding anyone to account the FCA has struck a “negligent” tone that is damaging to investors in the long term.
“The FCA needs to put its dentures back in,” says Shah. “Its lack of bite shows its deficiencies in really understanding how the industry works.”
7IM senior investment manager Peter Sleep says FCA investigations take time as they have to follow due process, noting it took five years to sort out compensation for investors in the Connaught Income funds which collapsed in 2012. Connaught’s ACD Capita Asset Services, which also presided over the blow-up of Arch Cru, was acquired by Link in 2017.
A spokesperson for the FCA told Portfolio Adviser: “As previously communicated, we are investigating the activities that led to the suspension of the LF Woodford Equity Income Fund.
“We recognise that parties are keen to receive details on its progress, however, in line with our policy, which has fairness and due process at its heart, we do not comment on ongoing investigations.”
Trapped investors still waiting to see what’s left of their investment
As the FCA drags its feet, trapped investors have stomached even bigger losses following the coronavirus volatility.
While 80% of the fund has been liquidated with cash returned to investors, the fund has lost 24.5% since the Covid sell-off began on 20 February. Around £558.4m worth of assets, most of them illiquid holdings, remained to be sold as at 20 May 2020, according to Morningstar, down slightly from £570.5m in mid-April.
>See also: Former Woodford portfolios signal how coronavirus could knock trapped investors
Some 291,520 of investors trapped in the fund are Hargreaves customers who invested in the fund directly or indirectly via its multi-manager range.
“Watching Hargreaves carry on going from strength to strength, with no sign of punishment or legal redress, must be especially galling for them,” says fees campaigner Robin Powell.
“Woodford was a huge money-spinner for platforms and brokers, as well as for Woodford Investment Management itself. The constant promotion of Woodford funds helped senior staff at firms like Hargreaves Lansdown to amass large personal fortunes.
“But those they persuaded to invest are still waiting to find out when they’ll get what’s left of their money back. Many of them are of relatively modest means. In some cases, the amounts they’ve lost are life changing.”
Highly unlikely Woodford will be fined by the FCA
Despite being at the eye of the storm, Modray says “it’s highly unlikely that Woodford Investment Management will be compelled to stump up any cash” by the regulator.
“It’s very disappointing that Neil Woodford, to date at least, does not appear to have been required to answer for his actions, “he says.
Sleep says the fund’s performance issues and suspension alone are not grounds for compensation. “As far as I can see, there has been no illegality or deliberate breach of regulations by Woodford. There were certainly some poor investment decisions and risk control, but if the protagonists acted in good faith, I cannot see grounds for compensation.”
This situation could change if the FCA finds there were internal control breakdowns that merit compensation, he adds.
However Modray says the key issue is the fund was “marketed very much as a mainstream fund for mainstream investors”.
“Whilst it is debatable whether his management of the fund was reckless, I imagine there are many investors who are still furious at the extent of their losses and exposure to illiquid investments in what they believed was a mainstream fund.”
IFAs could be on the hook for recommending Woodford Equity Income
Powell is more optimistic that wounded Woodford Equity Income investors will receive justice but says this is more likely to come from IFAs who recommended the fund.
“Those who invested with Woodford on the advice of a regulated financial adviser have a particularly strong case,” he says. “It’s certainly worth complaining, and then going to the Financial Ombudsman if you’re not fully satisfied with the response.”
Platforms that touted the fund on best buy lists could also be on the hook, Powell says.
“Third parties like Hargreaves are hoping to escape lightly on the basis that what they were offering wasn’t strictly advice. But of course, it was — and clearly many of their customers took it to be advice.”
There are currently four potential class actions against Hargreaves and Powell expects at least one of them to go ahead.
Leigh Day and Wallace LLP have told Portfolio Adviser they are continuing to investigate possible legal action against Hargreaves. Leigh Day says it has been contacted by over 3,000 investors in Woodford Equity Income so far, while Wallace LLP, which is working alongside RGL Management, says “matters are moving at pace and the overall size of the claimant group continues to grow”.
Hargreaves declined to comment on the potential legal actions. Portfolio Adviser understands it has not been contacted any law firm over a potential class action.
A spokesperson said: “We share investors’ disappointment and frustration. As soon as the fund was suspended from trading, we immediately removed our platform fees for the fund. The wind-up process is ongoing, and so far almost 80% of the fund has been returned to investors. As always, we will continue to support and inform clients as further developments are made.”
