A lot has happened in the UK since June 2019. None of us will ever forget Covid, the loss of loved ones, the economic destruction it brought about and the hole it put in the nation’s finances. A black hole that Rachel from Accounts widens every day as a result of her inability to curb public spending.
We’ve seen four prime ministers come and four go – and, for better or worse (I will let you be the judge), we now have the first Labour government since 2010.
Personally, I’ve lost my mother (Helen of Troy) to cancer, finally got divorced after a 13-year separation, and been diagnosed with prostate cancer.
Yet, in the financial world, one thing has not changed.
Investment manager Neil Woodford once considered the UK’s answer to Warren Buffett, has yet to be punished for the part he played in the collapse of his flagship fund, Woodford Equity Income.
A collapse that was hurried along by the fund’s suspension in June 2019 when a big institutional investor – Kent County Council – wasn’t able to get its money out. The withdrawal couldn’t be made because the fund’s portfolio was chock-a-block with illiquid stocks that were difficult to sell in a hurry.
Hands-on: Investment manager Neil Woodford once considered the UK’s answer to Warren Buffett, has yet to be punished for the part he played in the collapse of his flagship fund
A collapse which triggered painful losses for hundreds of thousands of investors despite a subsequent redress scheme.
Last week, after six long years, the City’s regulator, the Financial Conduct Authority, finally spelt out the punishment it would be meting out to Neil Woodford and his company, Woodford Investment Management: respective fines of £5.9 million and £40 million – and a ban preventing Mr Woodford from running retail investment funds in the future.
Hurrah, you would think. Justice at long last.
But not yet. Mr Woodford passionately believes he is innocent of any wrongdoing and has appealed against the regulator’s decision. It will be heard in the Tax and Chancery Chamber of the Upper Tribunal, which deals with appeals against enforcement decisions made by the FCA and other financial regulators, such as the Prudential Regulation Authority and The Pensions Regulator.
If the judge sides with Woodford, the fines and ban could be quashed.
Fund expert Alan Miller believes there are enough flaws in the basis of the regulator’s decision to make this a possibility. Equally, the judge could rubber stamp the FCA’s decision.
But irrespective of the outcome, we won’t find out for a while.
Judgments made in the Upper Tribunal are not handed out quickly. For example, an appeal made by two former Metro Bank executives against fines that the FCA wanted to impose on them for breaches of City listing rules was made in late 2022. It was only in June this year that the Upper Tribunal decided to uphold the FCA’s decision – a wait of more than two and a half years.
There is nothing to indicate that Woodford’s appeal will be judged any quicker.
So investors, sore over how Woodford has so far escaped financial punishment, might need to wait until the end of 2027 or early 2028 to discover whether he will finally pay a price for leaving them out of pocket.
I know this will irk many former Woodford investors because they have repeatedly told me they have waited too long for him to get his comeuppance. They feel let down on many levels.
First, by Woodford’s risky management of a fund labelled as a plain vanilla UK equity income fund – skewing the portfolio towards smaller illiquid stocks.
Most investors bought the fund on the understanding they were getting exposure to a basket of dividend-friendly UK blue chip shares, the strategy that proved so successful for Woodford investors when he previously ran money for Invesco Perpetual.
Secondly, by an inadequate £235 million redress scheme arranged by the FCA which still left most investors nursing big losses.
Thirdly, by the fact that while the FCA has been looking into Woodford, he reinvented himself as an investment strategist, inviting people to pay for details of portfolios designed to deliver income, growth or a mix of the two. It’s a business which currently sits outside the financial regulatory framework.
And of course, finally, by the regulator’s protracted probe into Woodford’s management of the fund in the run up to its suspension.
Many Woodford victims will not like to hear this, but even if the FCA’s decision is upheld it is likely the bulk of the fines will never be paid.
Woodford Investment Management, a limited company, might have generated big profits in the past – and regularly paid Woodford and his colleague Craig Newman multi-million-pound dividends – but it now has barely two pennies to rub together.
Unaudited financial statements for the year to the end of March 2024 indicate that it has net liabilities of £230,028.
In other words, its debts exceed its assets – and it does not have the financial wherewithal to pay a £4 million fine, let alone a £40 million one.
The £5.9 million personal fine shouldn’t be a problem – and it’s interesting that Woodford has just put his Salcombe bolthole on the market for £10 million.
Yet there is a possibility Woodford might not end up having to pay a penny.
Miller, the founding partner of wealth manager SCM Direct and previously with both Jupiter and New Star, has been a long-term critic of the way Woodford ran the Equity Income fund.
But he believes Woodford’s lawyers may well be able to pick holes in how the regulator has arrived at its decision.
He says the illiquidity of Woodford Equity Income’s portfolio was not just an issue ‘between 31 July 2018 and 3 June 2019’ – the time period used by the FCA to base the fines on. It went back even further.
For example, at the end of December 2014, according to the fund’s own accounts, 30 per cent of the portfolio were in illiquid assets, compared to 5 per cent for the Invesco Perpetual High Income fund that Woodford previously managed.
Miller says: ‘The fund was illiquid from day one, which begs the question: why didn’t anyone – the regulator or the fund’s overseer Link – do anything about it?’
He also says that there are a number of small cap UK funds open today which have highly illiquid portfolios.
These issues, Miller says, could help Woodford in his quest to get the FCA’s decision overturned.
A travesty, but one of the regulator’s making.
Last Wednesday, in the wake of the announcement from the FCA on the intended fines, I asked to speak to Neil Woodford to get his side of the story, but I was met with a wall of silence.
No surprise there. Six years ago the same happened when I drove to his company’s head office in Oxford at the crack of dawn to confront him in the wake of the fund’s suspension.
Although I was standing outside his offices when he arrived at 7am in a swish black Audi, he sneaked in before I could get anywhere near him – the company’s facilities manager at the time had just ordered me and my photographer to leave because we were on private property.
He might think silence is golden. I think he should pay a price for the way he let down his investors. But I’m not banking on it.
