Judge approves Woodford fund redress scheme: what does it mean for investors?
A high court judge has approved a redress scheme set up for investors of the Woodford Equity Income Fund, bringing them one step closer to getting money back, nearly five years on from its collapse.
After hearing arguments from interested parties, Mr Justice Richards said he 'saw no reason' to overrule the overwhelming number of investors who supported the compensation plans.
Here, Which? takes a look at what happened to the fund, how to access the compensation scheme, and what protections investors have if things go wrong.
What is the Woodford redress scheme?
Link Fund Solutions and the Financial Conduct Authority (FCA) announced a scheme in April to recover some of the remaining losses suffered by investors in the collapsed Woodford Equity Income Fund.
The scheme will pay back up to around £235m. The FCA said the scheme will recover approximately 77p in the pound for investors in the fund, though this figure has been contested by activist group Transparency Task Force, which argues it does not represent the 'true losses' of investors.
The key drawback of the scheme is that investors will no longer be able to take claims against Link Fund Solutions to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).
When investors in the fund were called to approve or reject the scheme, more than 54,000 voted and nearly 94% backed the scheme.
The FCA has said this scheme ‘won’t be the end of the story’, as it continues to investigate other parties involved.
What happened to the Woodford fund?
Neil Woodford, who ran the Woodford fund, had developed a reputation as a ‘star’ fund manager – even being awarded a CBE for services to the economy.
After a few years of strong performance, the Woodford Equity Income Fund’s performance started to decline, and investors began to take more and more money out.
In 2019, there was not enough easily accessible cash to pay out to exiting investors, and the fund was frozen to prevent anyone else from taking out their money.
Too much of the fund was invested in ‘illiquid’ assets, which are difficult to sell. So to sell them more quickly, some assets had to be sold for less than they were worth – exacerbating the poor performance of the fund.
The FCA found that Link Fund Solutions, who were supposed to oversee the running of the fund, failed investors who didn’t redeem their investments before the fund was suspended.
- Find out more: investment funds explained
How do Woodford investors access compensation?
Eligible investors – who didn't take out their investments before the fund was suspended – shouldn't need to actively seek out this compensation.
If you're invested directly into the fund, Link Fund Solutions should contact you about the scheme. If you invested through an investment platform or broker, they will receive these communications, which they should then pass on to you.
The first redress payment is expected in April, though if this judge’s ruling is appealed, that could be pushed further back. Appeals can be launched up to 23 February.
The first pay-out from this settlement redress will be an amount between £180m and £200m.
If you have any further information about the scheme you can find contact details on the Scheme website.
Will you get compensation if your investment collapses?
Generally speaking, no. When you invest, you are accepting that you could lose some or all of the money you put in if something goes wrong.
There are some exceptions to this – as we can see in the case of the Woodford fund.
Investors in the Woodford fund are receiving compensation because the fund collapsed due to mismanagement by the people running the fund, rather than because of poor performance.
You could also get money back if you invested due to advice from a financial adviser and were not made fully aware of the risks involved.
The two main routes to claim compensation for an investment gone wrong are through the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).
- Find out more: your rights as an investor
How to invest safely
There is no such thing as an investment with no risk, so if you’re not comfortable with losing any money you put in, you might be better off with a good savings account.
That being said, there are steps you can take to lessen the damage of a single investment going wrong in your portfolio:
- Balance your investment portfolio – If you invested all of your money in the Woodford fund, you’d be in big financial trouble. But, if you invested a smaller proportion of your portfolio in the fund, and split the rest elsewhere, you’d mitigate the damage that can be caused by a single investment going wrong.
- Do your own research – A lot of people invested in the Woodford fund because it appeared in Hargreaves Lansdown’s Wealth 50 list of ‘best buy’ funds – up to the day of the fund’s closure. It’s understandable why people trusted the list, which was compiled by a team with specialist fund knowledge, but it serves as a reminder that these lists aren’t a replacement for your own checks.
- Consider a financial adviser – If you find the process of choosing investments daunting, you can pass that responsibility on to an expert. However, that’s not to say they won't make mistakes too.
- Pick a decent investment platform – you can make a difference to your investing experience by choosing the right platform. You could save money on fees or get access to more information on how your investments are performing.
