A group of academics have warned that the planned £230m compensation for Woodford investors “would be likely to set a dangerous precedent” by scrapping “cornerstone” protections for investors provided by regulators.
In an open letter, the five academics cautioned that the proposed scheme could “forcibly denude affected investors of their statutory protections” provided by the Financial Ombudsman Service and Financial Services Compensation Scheme (FSCS).
Stockpicker Neil Woodford’s flagship fund was shut down in 2019, with investors chasing compensation from Link Fund Solutions – the administrator of the fund. Link was found by the financial regulator have made “critical” errors in its supervision of the fund, failing to appropriately manage the fund’s liquidity.
Last month, the scheme, organised by the Financial Conduct Authority and with the support of Link, was approved with 93.7 per cent of investors by number and 96.1 per cent by value voting in favour of the plan.
The scheme, which must now be approved by the High Court, will see the first payment, expected to range between £183.5m and £200m, made by 31 March.
Along with the payout, the scheme will mean that investors are no longer able to sue Link or submit claims with the FSCS.
“Imagine how the global financial crisis in 2007-10 might have played out had consumers been given any reason to suspect that the FSCS protection on their bank savings was not absolutely bulletproof,” the letter said.
“Sanctioning the above scheme could have grave, unintended consequences of increasing market volatility, diluting market participants’ trust and tarnishing the reputation of the UK financial services industry,” it added, which could create “a systemic risk” in the UK economy.
Urging the High Court judge to prevent the scheme’s approval in the hearing tomorrow (18 January), the letter asked whether the Treasury and Bank of England had been consulted on the scheme, and if the FCA had undertaken an impact assessment of the scheme’s consequences.
The academics writing the letter include Steve Keen, who claims to be one of the few that predicted the global financial crisis and Markus Krebsz, member of a United Nations economic commission.
Others included Andrew Clare, professor of asset management at Bayes Business School, David Llewelyn, former chair of the board of banking stakeholder group at the European Banking Authority, and Andy Schmulow, co-editor of The Cambridge Handbook of Twin Peaks Financial Regulation.