Decision maker

The FCA’s Regulatory Decisions Committee 

Individual / Firm

Neil Woodford and WIM

Sanction

A prohibition against Mr Woodford in relation to any function relating to investment management involving retail investors and, more broadly, any SMF or significance influence function in relation to any regulated activity.

Fines:

• Mr Woodford: £5,888,800
• WIM: £40,000,000

In coming to these figures, the FCA has taken into account a number of factors, including the losses incurred by retail investors, and proposes to apply uplifts to achieve credible deterrence which have the effect of:

• doubling Mr Woodford’s fine; and
• multiplying WIM’s fine around 8 times from almost £5 million to £40 million.

Provisions

Statement of Principle 2 (due skill, care and diligence in carrying out accountable functions); and Statement of Principle 6 (due skill, care and diligence in managing the business of the firm)

Principle 2 (skill, care and diligence)

Relevant period

31 July 2018 to 3 June 2019

Key facts

In 2016, Mr Woodford co-founded WIM as an investment management firm and it took over management of the WEIF, an open ended UCITS fund. Mr Woodford held a number roles within WIM including head of investment management and lead fund manager for the WEIF and the designated risk owner for all investment risks associated with WIM’s funds including liquidity risk. He was also approved to perform controlled functions (CF1 (director) and CF30 (customer)).

A third-party entity acted as the WEIF’s authorised corporate director (ACD) responsible for managing and administering the WEIF in accordance with FCA rules (in the COLL sourcebook).

The investment management agreement between WIM and its ACD included provisions under which WIM agreed: (i) to be responsible for ensuring the fund was managed in accordance with certain regulatory requirements and with reasonable care and skill; and (ii) to consider the liquidity profile of the assets in the fund. 

In May 2017, the net asset value of the WEIF reached a peak of over £10 billion. In April 2017, following the UK’s vote to leave the European Union in June 2016, Mr Woodford refocused his investment strategy for the WEIF away from large global companies towards UK companies which were frequently smaller and less well capitalised. This led to a change in the balance of the WEIF’s holdings away from highly liquid stocks to those which were less liquid. Many of the WEIF’s assets could not be liquidated within the timeframe necessary to meet redemptions under the regulatory framework and the fund’s terms and conditions. This gave rise to liquidity risk. 

Following a trend of poor performance, investor redemptions and deteriorating liquidity, by the time of the fund’s suspension in June 2019, the WEIF’s value had fallen to around £3.6 billion and, as it was put into liquidation without reopening, investors’ holdings could not be redeemed at will. 

Key Findings

The FCA concluded that, between 31 July 2018 and 3 June 2019:

• Mr Woodford breached Statement of Principle 2 (due skill, care and diligence in carrying out accountable functions); and Statement of Principle 6 (due skill, care and diligence in managing the business of the firm). 
• WIM breached Principle 2 (skill, care and diligence).

The breaches can be summarised as arising from:

1. the unreasonable and inappropriate liquidity profile of the WEIF and WIM’s failure when making investment decisions to pay due regard to the liquidity profile of the fund (the FCA referenced investment decisions based on Mr Woodford’s conviction and which were not balanced from a liquidity perspective which resulted in an increase in the proportion of less liquid shares held);
2. WIM’s failure to implement its risk framework effectively – in particular it failed to manage the WEIF in accordance with its stated risk appetite (while recognising the need to ensure sufficient liquidity to meet investor redemptions) and failed to carry out the annual risk appetite review;
3. the unreasonable and inappropriate metrics and methodologies used to measure the WEIF’s liquidity;
4. a failure to respond reasonably or appropriately to warning signs including warnings given and concerns expressed by the ACD. 

Mr Woodford and WIM made a number of representations which included reference to the following:

1. the ACD was responsible for compliance with regulatory requirements and had regulatory responsibility for managing liquidity risk (and the IMA imposed on WIM contractual but not regulatory responsibilities);
2. WIM was subject to a liquidity risk framework designed by the ACD which imposed limits on the fund’s liquidity and it was reasonable to assume these represented a reasonable and acceptable liquidity profile;
3. this is not a case involving dishonesty or lack of integrity and the proposed financial penalties and prohibition are not justified.

The FCA rejected all the representations and its findings indicate it took the view that:

• Mr Woodford had a defective and unreasonably narrow understanding of his responsibilities in respect of liquidity risk. He treated his role as being to manage within the limits but not take reasonable steps to ensure they were appropriate; 
• he wrongly took the view that he was entitled to assume that Risk and Compliance and/or the ACD had set appropriate metrics and they would determine what information he received so he did not have to make enquiries and he only challenged the liquidity risk framework when it suited him;
• the contractual obligations on the firm which included compliance with certain regulatory requirements were fundamental to considering compliance with the requirement to act with due skill and care (even where the regulatory requirements were not directly applicable).