Link Fund Solutions’ Scheme of Arrangement for Woodford investors could “forcibly denude affected investors of their statutory protections“, according to the Transparency Task Force campaign group and several finance academics, who warn that sanctioning the scheme could lead to unintended consequences for the UK financial services industry.
Retail investors have statutory protections allowing them to seek compensation in certain cases via the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) under The Financial Services and Markets Act 2000.
However, under Link’s Scheme of Arrangement for investors affected by the collapse of the Woodford Equity Income fund (Weif), FSCS protections would be removed, though the scheme does not prevent creditors from bringing claims against a third party.
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The claims come ahead of the announcement of the High Court’s decision on whether to sanction the scheme of arrangement, expected to be published in early February.
Link’s compensation scheme has been approved by 93.7% by number and 96% by value of the 54,000-strong scheme creditors at a scheme meeting in December. The scheme is currently awaiting High Court approval before payments can be distributed to those affected.
Finance academics professor Steve Keen, professor Markus Krebsz, professor Andrew Clare, professor David Llewelyn and Dr Andy Schmulow penned an open letter to Justice Richards on 16 January highlighting the issue they see as a dangerous precedent.
They said: “We have no wish to become involved in Link or the merits of its proposed scheme. However, we are concerned the proposed scheme in its current form, if sanctioned, would forcibly denude affected investors of their statutory protections. This would occur many years after they had relied on boilerplate statements asserting the existence of those protections whilst making their investment decisions in good faith.
“Such a ruling, akin in effect to a removal of statutory projections under FSMA for approximately 300,000 retail investors, would be likely to set a dangerous precedent for the UK financial services market at large, thereby constituting a public interest case.
“In addition, sanctioning the above scheme could have grave, unintended consequences of increasing market volatility, diluting market participants’ trust and tarnishing the reputation of the UK financial services industry.”
Implications for wealth managers and IFAs
Transparency Task Force head of strategy Mark Bishop believes that waiving retail investors’ FSCS protections could have an adverse impact on wealth managers and independent financial advisers.
He told Portfolio Adviser that any decision which strips investors of their statutory rights to seek compensation through FOS and FSCS could see firms effectively copying the process in the future, settling through a scheme of arrangement rather than the FSCS levy footing the bill.
“It effectively changes the game quite significantly in terms of what we understand about consumer protections in UK financial services,” he said. “If the scheme of arrangement is sanctioned by the court, it will set a precedent that means that other firms in the industry can go down the same route.
“In the medium term, it’s catastrophic for the industry. If the scheme of arrangement is passed, I would think that it would be incumbent on IFAs to write to people and say we put you into those funds because we said that they were FSCS protected. Those protections can no longer be relied upon, and you might want to consider reallocating your capital – a huge amount of work for no money.
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“Secondly, for wealth managers, the position is even worse because they’ve made decisions for their clients and those decisions are going to look retrospectively dodgy. Of course, if those decisions included putting people into the Woodford Equity Income Fund, then actually the clients could come back to them and says, ‘You never told me that I can be deprived of my positive FSCS and FOS rights’.
“That would be a significant problem. There is a bigger problem as well for the industry as a whole, which is that if ever people are deprived of the statutory rights, they will tend to behave differently in the future. As a result, the Woodford Equity Income Fund had 300,000 direct investors that were trapped in it where it was gated, and another 240,000 who were invested in funds that invested in it. So 540,000 people were affected, and will be deprived of redress that they thought they were going to get.
“They’re going to tell their friends and at that point, there is a large number of people who are in the target market for financial advice, wealth management, and retail investment products, who now believe it’s safer to keep their money tied up in the family home or in a buy-to-let, or in deposit accounts and therefore don’t want to trade with the industry. That is very damaging if you are an industry participant.”
FCA’s alleged failures
The Transparency Task Force has been vocal throughout the Woodford saga on alleged failures by the FCA during the compensation process.
The group argues that the FCA is “desperate” to have the Woodford redress scheme approved, in order to protect the FSCS levy, following previous involvements with Link and its predecessor Capita Financial Managers in the handling of redress for investors in CF Arch Cru Investment and Diversified funds and Connaught Income Fund Series 1.
Bishop said: “We believe that the FCA, in 2017, placed itself in a position that resulted in it having to turn a blind eye to LFSL’s failings in its conduct as ACD of the Woodford Fund, in order to secure redress for Connaught investors that it hoped would take the reputational and political pressure off itself. And in doing so, as happened when it allowed the same firm to get away with no regulatory sanction for Arch Cru and Connaught, it simply caused a firm that was known to be defective to incur a still larger liability, further down the line.
“It is the apportionment of that loss that the Scheme of Arrangement seeks to deal with; it seeks to unfairly, irresponsibly, incorrectly and we argue unlawfully apportion that loss to the investors, and not where it should be – on the FSCS, and thereby, on the industry.”
He added: “It is therefore our hypothesis that the FCA was desperate to get the Scheme of Arrangement passed in order to avoid that liability falling to the FSCS, which would cause the industry – and especially the investment management sector – to ask difficult questions about how LFSL was able to buy its way out of regulatory sanction for Arch Cru and Connaught, and to be foisted on Woodford Investment Management; let alone the wider questions about how two individuals with colourful histories well known in the sector were able to achieve accelerated authorisation, or be authorised at all given their past conduct, and with minimal governance to keep them in check.”
The FCA was contacted regarding the claims, but Portfolio Adviser did not receive a response in time for publication. Link Fund Solutions declined to comment.
