The Transparency Task Force has called into question the suitability of the Financial Conduct Authority’s action against Link Fund Solutions in deterring future mismanagement by authorised corporate directors (ACDs).
The FCA’s action against Link came in the form of an 83-page final notice which found the firm failed to act with “due skill, care and diligence” in its overseeing of the Woodford Equity Income fund (Weif).
The regulator found that LFS failed to properly manage the liquidity of the fund between 31 July 2018 and the fund’s suspension on 3 June 2019.
After the announcement of the action against Link, Therese Chambers, FCA joint executive director of enforcement and market oversight, said a key objective in the regulator’s enforcement work was around deterrence.
“In order to achieve deterrence, we need firms to understand where serious failings have led to enforcement action, so that they can make the necessary changes in their own behaviour. This is all part of using enforcement to raise standards across the industry.”
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The final notice revealed that the regulator would have sought to impose a fine of up to £50m had Link not settled on a redress scheme to compensate trapped investors in the fund.
The FCA said, however, said that imposing a financial penalty may have resulted in a reduction of the amount of restitution available to be paid to Woodford investors by Link.
Meanwhile, no action has been taken against any individual on LFS’s side for the mishandling of the Woodford Equity Income fund, with the FCA satisfied that only the firm should come under the scope of its investigation.
It is worth noting that, in response to last Thursday’s action, LFS said it would have contested the findings and any potential fine had it not agreed to a redress scheme.
Responding to the final notice, an LFS spokesperson said: “As we have previously stated, LFSL 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.”
Transparency Task Force
Reacting to the FCA’s action against LFS, Mark Bishop, leader of the Woodford Campaign Group, queried the effectiveness of the action taken by the regulator.
The Woodford Campaign Group, launched by the Transparency Task Force, campaigned unsuccessfully against the implementation of Link’s scheme of arrangement.
Bishop said: “The question we should be asking is what has been done to deter the senior executives, or their peers in competitor firms. In this case, nothing. There has been no sanction of individuals. The FCA even approved the sale of ACD contracts from Link Fund Solutions to Waystone Group, which was conditional on the transfer of two key executives from Link. So they’ve gotten away with it. This will embolden them, and their peers, to believe that the FCA is a chocolate teapot.
“The FCA made a key decision – that the ACD could be held responsible only for the losses caused by the relative lack of liquidity affecting those investors who were trapped when the fund was gated. This was in itself an unfortunate signal to the market – that ACDs are not liable for preventing other breaches by fund managers, of which malinvestment is the most serious.”
He added: “It is difficult to see how Link Fund Solutions, which was responsible for the fund’s documentation and was aware of every transaction, can be excused for having failed to have noticed that a retail equity income fund was investing in start-ups and early-stage businesses that generated no income but actually consumed cash, and acted to either constrain or remove the fund manager.
“If this is really the FCA’s settled position then the ACD model is broken and change is needed.”
Responding to the TTF, an FCA spokesperson said: “After a thorough investigation, we are satisfied that we have taken action against the appropriate parties in this case.
“Regulation cannot compensate for the poor performance of investments. The investment strategy in this case was transparent and well disclosed and information on its performance was available to investors.
“Our work has focused on the unfairness of poor liquidity management, leading to those investors who were trapped in the fund when it was suspended losing out. We are pleased that we were able to secure significant redress in this case.”
The FCA points out that there are clear responsibilities – the role of the investment manager is to provide investment management services, including making investment decisions, monitoring the performance of the fund and communicating with investors.
The role of the ACD is to oversee the management of the fund, including its investment activities, act in the best interests of the fund’s investors, and ensure that the fund is managed in accordance with its prospectus and applicable regulations.
Will the action taken raise standards?
Ben Yearsley, investment director at Fairview Investing, argues that the redress scheme is enough of a deterrent to ACDs in itself.
He said: “Link has sold the business and used the proceeds to pay compensation. Could the FCA have got more from them? Maybe. Should they have? That’s a far harder question to answer.
“Link has essentially been forced out of the UK market due to its actions. That seems a pretty good deterrent. It feels like this is a one off situation- bearing in mind it’s now five years since Woodford blew up, and there haven’t been any other major issues.”
Meanwhile, City Hive co-CEO Bev Shah said that the action taken, when coupled with additional oversight of behaviours through Consumer Duty, should not just improve standards but also expand the scope of what ACDs are monitoring.
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Richard Ellis, partner at law firm Charles Russell Speechlys, also believes the action taken accomplishes the FCA’s deterrence objective.
“This provides a stark reminder to authorised corporate directors of the need to think holistically and over the long-term. When faced with investors wanting to redeem their investments, there may often be a temptation to meet those redemption requests by liquidating the fund’s more liquid assets.
“This temptation should be resisted. Once the more liquid assets are gone, only the less liquid assets will be left. This means that the liquidity profile of the fund will inevitably deteriorate – to the detriment of the remaining investors.
“It is against this backdrop that the FCA identified breaches not only of the firm’s duty to conduct its business with due skill, care and diligence but also of its duty to pay due regard to the interests of its customers and treat them fairly. Certainly a warning shot to other financial services businesses tempted to do the same.”
