Since being suspended, the value of many of the assets held within the WEIF has reduced significantly, meaning that investors have received, or will receive, significantly less than the value of their investments at the point of suspension.
The FCA says Link’s failings materially contributed to the risk that suspension would be required, and placed those investors who did not redeem prior to the point of suspension at a disadvantage.
The ‘first mover advantage’ for those redeeming earlier was exacerbated by the failure of Link to adequately monitor how redemptions were being met by WIM and to help prevent further deterioration of liquidity.
The FCA said: “[The] losses were unfairly and disproportionately borne by those investors who did not redeem early and were left with a fund with an illiquid rump of unquoted assets.”
Regulatory responsibilities
According to the final notice, as WEIF’s ACD from the fund’s inception in May 2014, Link had regulatory responsibilities for the management of the fund. Link monitored and oversaw WEIF and was required to ensure that it acted in the interests of all investors.
Managing liquidity risk is a key function of an ACD. While an ACD may delegate the investment management of a fund to an investment manager, in this case WIM, the ACD remains responsible for ensuring that liquidity risk is managed appropriately.
Broadly, an ACD maintains regulatory documentation, including the prospectus and the key investor information document.
It also maintains operational relationships with key stakeholders, including shareholders and the FCA, values and ensures accurate pricing of the fund’s assets, and monitors relevant activities of the investment manager.
According to the final notice, WIM had two roles: it was the sponsor of WEIF and WEIF’s investment manager.
As sponsor, WIM defined the principal features of WEIF and engaged Link as ACD. WIM provided Link with all necessary documentation to establish the fund, and maintained those documents throughout the life of the fund.
WIM also retained responsibility for discretionary investment management and advisory services to achieve WEIF’s investment objectives.
From July 31 2018 until the fund’s suspension, Link failed to comply with its regulatory obligations as ACD in respect of liquidity in four key areas, the FCA said:
- WEIF’s liquidity profile was unreasonable and inappropriate in light of the redemption policy in the fund prospectus, which allowed investors to redeem their investment within four days. However, Link failed to take adequate steps to deal with the problem.
- The metrics used to measure liquidity contemporaneously (including stress testing) were unreasonable and inappropriate.
- Link failed to properly supervise WIM.
- WEIF held securities that were originally unquoted but later admitted to eligible markets.
Between October 2014 and October 2015, WEIF invested in a collection of companies that were unquoted, which meant that the relevant securities they issued were not listed and traded on an exchange..
On August 2017, WIM suspended any further investments in unquoted securities, as WEIF was approaching the 10 per cent limit of unquoted securities in the portfolio, as set out in the FCA's Ucits rules.
By the end of November 2017, the percentage of unquoted securities held by the WEIF was 9.82 per cent.
The FCA said, unknown to Link, WIM notified each of the four companies – Sabina Estates, Ombu Group, Industrial Heat, and Benevolent AI – about the challenges of making further investments as well as WEIF nearing the 10 per cent limit.
