On March 5 2024, a scheme of arrangement to compensate more than 250,000 investors who lost out following the winding up of the suspended Woodford Equity Income Fund became fully effective.
The scheme had previously been sanctioned by the High Court on February 9 2024 after a two-day hearing. It was approved by the high court last month.
The redress scheme arose following findings by the Financial Conduct Authority that Link Fund Solutions, the Woodford fund’s authorised corporate director, failed to appropriately manage the liquidity profile of the fund, meaning that those who did not redeem their investments before it was suspended on June 3 2019 were unfairly disadvantaged.
LFS will make available a settlement fund of up to £230mn to investors who suffered loss, representing 77 per cent of the restitution that the FCA has calculated is due to them.
The settlement fund comprises all of LFS’s assets, together with a voluntary contribution of up to £60mn from its ultimate parent company to bolster the redress.
Investors will receive a distribution from the settlement fund proportionate to their original investments in the Woodford fund, and it is anticipated that the scheme will make payments from early April this year.
In return for the establishment of the scheme, the FCA has agreed to settle its enforcement case against LFS and will not pursue a £50mn penalty.
Controversial
The scheme has, however, proved to be controversial. Prior to handing down its judgment sanctioning the scheme, the High Court rather unconventionally received an “open letter” written by five academics warning of what they saw as a “dangerous precedent” being set if the scheme were sanctioned.
In addition, the scheme was also subject to an attempt by the investor group Transparency Task Force to seek permission to appeal the High Court’s decision, which was rejected at the end of last month.
One of the primary reasons for the controversy surrounding the scheme was that in bringing about a general discharge of LFS’s civil liabilities arising out of the suspension of the Woodford fund, the scheme now precludes investors from seeking compensation through the Financial Ombudsman Service and the Financial Services Compensation Scheme.
Those who opposed the scheme argued that these statutory routes to redress could not be removed as they “have the nature of inviolability”, but the High Court did not accept that submission.
Despite its opponents, an overwhelming majority of 96 per cent of scheme creditors by value voted to approve the Woodford scheme at the court hearing.
That is perhaps an understandable outcome in circumstances where the scheme offers investors a straightforward method of recouping a significant proportion of their losses in a more timely manner.
If the scheme had not become effective, the alternative routes to redress through the FOS and FSCS (and also the courts) might possibly have yielded better recoveries for at least some investors, but this would also have come with greater uncertainty as to whether their claims would be fully upheld and would have taken longer.
