Fine Amount: £40,000,000
Primary Violation: Liquiduty Management
Relevant Period: 31-Jul-28 > 3-Jun-19
Overview
The Financial Conduct Authority (FCA) issued a Decision Notice imposing a £40 million financial penalty on Woodford Investment Management Limited (WIM) for breaching Principle 2 of the FCA's Principles for Businesses.
The breaches occurred between 31 July 2018 and 3 June 2019, during which Woodford Investment Management (WIM) failed to manage liquidity risks effectively in the LF Woodford Equity Income Fund (WEIF), a UCITS fund. This led to an inappropriate liquidity profile, unreasonable investment decisions, and inadequate responses to warnings, culminating in the fund's suspension and liquidation, causing significant investor losses.
WIM served as the investment manager for the WEIF, an open-ended UCITS fund authorized by the FCA in May 2014, with Link Fund Solutions Ltd as the Authorized Corporate Director (ACD). The WEIF's prospectus allowed investors to redeem units within four business days, requiring WIM to maintain a prudent liquidity profile under FCA rules, including COLL Chapter 5, which mandates a spread of risk and limits on unquoted securities to 10% of net asset value (NAV).
During the relevant period, the WEIF experienced persistent redemptions and poor performance, with NAV declining from around £6 billion in July 2018 to £3.6 billion by June 2019. WIM's failings included maintaining an unreasonable liquidity profile, making investment decisions that worsened liquidity (e.g., selling more liquid assets to meet redemptions without rebalancing), and using inappropriate metrics and stress testing. WIM ignored warnings from Link and internal metrics showing deterioration, such as crossings of liquidity triggers. Instead, WIM altered monitoring frameworks to avoid breaches without addressing underlying issues.
The FCA found that WIM breached Principle 2 by not exercising due skill, care, and diligence. This increased the risk of suspension, disadvantaging remaining investors. The WEIF was suspended on 3 June 2019 following a large redemption request from Kent County Council, and later wound up, returning approximately £2.5bn to investors amid asset value reductions.
During the relevant period, WIM's investment activity involved selling approximately £2.2 billion in shares while purchasing £0.9 billion, resulting in a net outflow of £1.3 billion. This was not balanced; WIM disproportionately sold more liquid assets (e.g., in the 12 months ending 31 July 2018, 87% of sales were from Buckets 1 and 2 under the Revised Four Bucket Model, while only 13% were from Buckets 3 and 4).
Conversely, purchases were weighted toward less liquid assets, with Buckets 3 and 4 comprising a higher proportion of buys than sells. This led to a significant deterioration: the proportion of assets in Bucket 1 (liquidatable within 7 days) fell from 18% in July 2018 to 8% by June 2019, far below Comparator Funds.
WIM prioritised investment conviction over liquidity, as noted internally: "the fund manager has chosen to liquidate those positions that he has the least conviction in". Additionally, WIM increased holdings in illiquid TISE-listed securities despite their unquoted-like characteristics and the fund's deteriorating profile, breaching the spirit of the 10% unquoted limit.
Examples of purchases in illiquid securities include:
WIM used unreasonable metrics, such as the Initial T+20 Metric (measuring assets liquidatable within 20 days, assuming a 20% Participation Rate and Linear Allocation). A 25% trigger was crossed continuously from August 2018, nearing the 20% limit, prompting internal concerns like "hard to argue we’re meeting our COLL liquidity obligations". Despite this, WIM discontinued triggers/limits in September 2018 without adequate replacement.
The Revised Four Bucket Model (adopted October 2018) assumed a 100% Participation Rate and Full Allocation, creating an overly optimistic view; had a 20% rate been used, triggers would have been crossed earlier. Stress testing was inadequate, failing to model extreme scenarios (e.g., 40% redemptions), and used a 12-month ADTV average that smoothed fluctuations.
By April 2019, even under the Revised Model, Bucket 4 exceeded 30%, but no effective action followed. The WEIF was an outlier among 221 Comparator Funds, with Bucket 1 holdings lower than all others throughout.
As early as November 2017, Link warned WIM of an "unbalanced" liquidity profile with increased exposure to illiquid Buckets 3/4, urging rebalancing to reduce Bucket 4 and restore Bucket 1. WIM did not act, responding with references to past redemptions having "no material impact."
Warnings persisted: in May 2018, Link imposed limits (e.g., 70% on Buckets 3/4), but WIM treated them as exhaustive rather than addressing root issues. By September 2018, amid trigger crossings, WIM pushed for changes, leading to the Revised Four Bucket Model, which immediately reduced reported illiquid assets from 75.64% to 65.64% without portfolio changes. Link repeatedly urged improvement (e.g., "strongly urge WIM to bring the liquidity profile out of the trigger" on 28 March 2019), but WIM disagreed, proposing further metric changes on 9 April 2019.
Internal governance failed, e.g., no 2019 risk appetite review despite "medium" liquidity appetite, prioritizing strategy over controls as minuted in March 2019: "we use every lever... to allow [Mr Woodford] to execute his strategy". This culminated in suspension after KCC's redemption request.