The Financial Conduct Authority made a comforting noise last month announcement.
He stated that investors in by Neil Woodford Equity Income Fund, closed in 2019 after the precipitous plunge in value and a spate of withdrawals, they could receive 77p of their outstanding losses under a compensation scheme negotiated by the regulator.
The FCA has presented the deal as a way to draw a line under one of City’s biggest recent retail financial scandals, in which Woodford was accused of mismanaging his fund and making excessive bets on risky unlisted companies .
But the deal isn’t as generous as it might seem. The compensation amounts to just £235m, just over a fifth of the £1.05bn gap between the £3.61bn value of the fund when it closed and the £2.56bn it has since closed. were distributed to investors. That’s 22.4 pence in the pound.
To achieve its 77p figure, the FCA focused closely on the extra losses incurred by gated investors on illiquid investments relative to the position of those clients who exited immediately before gated. The £235m is 77% of £298m. No compensation is foreseen for the larger £752 million outstanding capital loss suffered on the sale of liquid and illiquid assets after gated. In addition, since 2019 there is no interest or compensation for not having access to money.
In addition, the operation is reserved for 350,000 investors trapped when the fund was suspended; nothing for the unknown thousands of others (the figure was never disclosed) who withdrew their cash, and crystallized their losses before the fateful gating. According to Morningstar, the fund’s price has plunged 38% since its peak in June 2017 in the two years before the gating.
There is currently no provision for harm caused by defaults in relation to anything other than liquidity breaches on unlisted investments. Other investments were listed, but some weren’t the established dividend-paying companies that consumers might expect to find in a large equity income fund.
The FCA says it will address this criticism in its full findings in October. Its investigation of other parties continues, and the prospect of further damages from those companies may yet be raised.
The FCA justifies its approach by distinguishing between losses “based on misconduct [and those] caused by fluctuations in the market value” of investments. It adds that the compensation “is not designed to cover losses in relation to investment strategies, if the risks to them are well disclosed” or “hypothetical” returns that could have been achieved elsewhere.
The proposed payment would come from Link Fund Solutions (LFS), the fund’s authorized corporate director, the company charged with protecting investors’ interests. He was responsible for appointing the fund manager – Woodford – and overseeing the fund’s compliance with its stated equity-income investment mandate and limits on illiquid holdings and loans. The offset deal is presented as voluntary, but has clearly been secured by LFS through lobbying from the FCA and comes with the implied approval of the regulator.
If the sum is ever paid, it is subject to investor approval and al sale of LFS to an Irish rival, Waystone Group – LFS and its management will escape without a fine or ban. Furthermore, the FCA will likely overlook any shortcomings of LFS in relation to anything other than unlisted holdings.
There will be no obstacle to the company, owned by Waystone, which will continue to manage customers’ money. The FCA stresses that the transaction will be subject to the usual approval processes, but should give its green light.
This isn’t the first time LFS has escaped an FCA crackdown by paying partial compensation – it has done so in two cases involving misconduct claims: Arco Cru in 2012 and Connaught in 2017.
Why is the FCA endangering the savings of millions by allowing this serial offender to continue trading?
I believe the main reason is that a larger restitution order would have driven LFS into insolvency, causing eligible claims (up to a ceiling of £85,000) to be met by the Financial Services Compensation Scheme (FSCS), the protection fund funded by industry. Had the FSCS accepted the argument that LFS breached its obligations by failing to stop Woodford’s “style drift” from safe to riskier “moonshot” equity income securities, clients would have received significantly more money .
Perhaps the FCA acted the way it did because many in the industry are already chafing about the FSCS levy, which funds such compensation and which companies call the “regulatory failure tax.” It jumped 25.5% to £900m last year.
If the FCA fails to secure compensation from LFS for the Woodford victims, it could face claims to hoard cash both from injured investment clients and from an industry fed up with the costs of the FSCS levy. Conceding the principle in this case could open the floodgates for many others.
Why Woodford Investors Don’t Sue FCA? Simple: it enjoys broad legal immunity from civil liability.
Many backbench politicians want this to change: Tory MP Bob Blackman MP and Labor colleague Baron Prem Sikka recently unsuccessfully tried to amend the Financial Services and Markets Bill to allow retail investors to seek compensation for losses incurred due to errors and inaction of the FCA.
The government – and the Labor leadership – oppose such reforms, I think, because they are keen to avoid acknowledging the scale of the problem and having difficult conversations about whether taxpayers or industry should cover the likely bill for the historic cases. .
Until our political leaders accept that the City is locked in a cycle of misconduct, poor regulation and low trust, we cannot solve the underlying problems and give consumers adequate protection.
Mark Bishop heads campaign strategy at the Transparency Task Force, a group that promotes transparency in financial services. He is particularly interested in the Woodford case
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