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Lawyers and consumer champions have warned that the £235mn compensation offered to thousands of investors trapped in former star manager Neil Woodford’s collapsed fund is not enough to cover their losses and might not even be paid out.
This week, the Financial Conduct Authority announced the redress package, nearly four years after Woodford’s flagship Equity Income fund was frozen, trapping some £3.7bn of investors’ cash.
Woodford’s administrator, Link Fund Solutions, imposed the freeze in June 2019 after many investors tried to withdraw at the same time.
After a lengthy investigation, the FCA concluded this week that LFS made “critical errors and mistakes” which “caused significant losses for those investors who remained in the fund when it was suspended”.
Some analysts welcomed the compensation offer, which will be paid using LFS’s assets and the sale of the administrator to rival Waystone Group. The FCA said investors would recover 77p in the pound.
Ben Yearsley, investment director at Shore Financial Planning, an advisory group, said: “This is likely to be the best outcome for investors.”
But critics have warned that the deal has not been finalised and the offer is not as enticing as it might appear.
Robin Powell, a financial author who has campaigned on behalf of Woodford investors, said: “It’s by no means certain they will receive compensation and it may drag on for a long time yet.”
He said there were still “stumbling blocks”, including the sale of LFS, which has already been hit with delays and needed to be approved by investors. The compensation was also dependent on a court-approved agreement between creditors and LFS that would settle all the fund administrator’s debts.
“If, for either of those reasons, the compensation plan doesn’t go ahead, the FCA has said it will continue with its enforcement action using its statutory powers,” Powell added, noting that this action would include a £50mn fine and possible legal battle between LFS and the regulator.
He added the process to sell the remaining assets in the Woodford fund could “still take a year or two” and that investors “have received far less back than they had been hoping for.” To date, some £2.56bn has been returned from the sale of frozen assets in the fund.
Three law firms — Leigh Day, Harcus Parker and Wallace — are also seeking compensation from Link on behalf of thousands of investors.
Harcus Parker, which represents about 6 per cent of the shareholders by value, estimates its clients’ losses are over £160mn.
Daniel Kerrigan, senior associate at Harcus Parker, said the FCA’s proposal “is a bad deal for investors who will still lose meaningful sums of money”.
The amount of redress is less than the original £306mn proposed by the FCA, although the watchdog noted that this figure was “substantially greater” than the value of LFS’s remaining assets.
Kerrigan added: “I’m sure the investors will understandably be outraged by this offer. We will continue to push to get the full compensation that they are entitled to.
“The FCA claims it means investors will end up with 77p in the pound, but we cannot replicate their maths, as there are 3.85bn shares, 64p has been returned to investors so far and we cannot see how £235mn equals a further 13p a share. It is also far from certain that any of this will materialise anyway.”
The Woodford debacle has shone a particular light on the way funds are labelled and sold, especially in relation to the level of risk connected to a product’s strategy.
Holly Mackay, managing director of consumer site Boring Money, said: “The core error was labelling a Vindaloo as a Korma, as retail investors piled into something which was mislabelled,” she said, referring to the amount of risk in the fund.
She added: “In my opinion, Neil Woodford’s mistake was not what he did, and not what he chose, but how he positioned it to investors. He certainly comes out of this badly. I think the bottom line is that this has dragged on forever; people will argue for years to come about whether the fund should have been suspended, who was at fault and what the redress should have been.”
The FCA said: “We have seen reports raising doubts about the level of compensation Woodford investors will receive. The starting basis for the calculations made by a law firm is wrong and we can confirm that investors will receive up to 77p in the pound. This amount is more than would be available under any private legal action given how the redress will be paid for.”
Woodford could not be reached for comment.
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