The legal options for trapped Woodford investors

A silver lining may finally have emerged for the roughly 300,000 investors trapped in the former Woodford Equity Income fund, with several legal claims gearing up to seek compensation on behalf of investors.

While some investors have already complained to the Financial Ombudsman Service about firms involved in the scandal, legal action offers an alternative way to seek compensation. But investors cannot back more than one horse, and serious consideration should be given to the differences between potential claims.

What options are there?

Four possible claims have emerged. Harcus Parker issued a letter before action – effectively the first step in a legal dispute – to Link Fund Solutions, the authorised corporate director (ACD) on the doomed Woodford fund last year. Leigh Day announced that it had done the same in March this year. RGL Management has sent letters to both Link and Hargreaves Lansdown. Slater and Gordon, meanwhile, has “formulated potential claims” against Link and Hargreaves Lansdown (HL.). Nelsons, which had considered cases against both, has since opted not to move forward with the claims for commercial reasons.

As our table below shows, the claims have thousands of investors either signed up or interested in joining. There is still time for others to do so. But legally you cannot be compensated for the same loss twice, and a firm will not take you on if you are already signed up for another claim. Equally, if a Financial Ombudsman Service complaint resulted in compensation you would not then be able to join a legal claim.

Those who have joined a claim do have a 14-day cooling-off period, but after this, leaving a claim to join another could incur some costs.

To cover the process very generally, a letter before action is sent to a possible defendant, outlining a grievance. The defendant then has three months in which to reply. If they do not reach a settlement at this point, the legal team can issue a claim, effectively registering it with a court. The next step is to serve a claim to the defendant. This can later result in a court case. Harcus Parker notes that it should make an issue of claim in the coming months.

Woodford investors should note that these claims are likely to be grouped together for the purposes of any court case. This may influence your choice of claim, as discussed later.

Whoever you choose, patience will be required. When asked how long they expected the process to take, Leigh Day, Harcus Parker and RGL all estimated a rough period of two to three years.

Yet the rewards could be significant. Commenting on the possible level of compensation targeted, Leigh Day notes: “It is envisaged that it will be greater than the difference between the amount of the original investment and amount received through the capital distributions that have taken place as part of Woodford Equity Income’s winding up, as we will also seek to recover the return on investment that investors were entitled to expect.”

Finally, investors should check whether there are deadlines on when they can join a claim. In the case of Leigh Day, the claim against Link relates to a breach of statutory duty, and court proceedings must be issued within six years of such a breach occurring. Because Leigh Day believes these breaches may have started to occur in 2016, it argues that proceedings must be issued no later than January 2022. Harcus Parker and RGL have not set a date, but courts can set time limits which will be publicised when they emerge.

Fees and insurance

We do not yet have full details of Slater and Gordon’s possible claim, but the other three firms have outlined the main aspects of their approach. One detail drawing attention is the maximum fee that could be taken. Harcus Parker’s is notably high, at 42 per cent of the amount won, compared with 30 per cent for Leigh Day and 25 per cent for RGL. All firms, however, are operating on a 'no win, no fee' basis.

Having already suffered financial losses, investors will be keen to avoid seeing a significant amount eaten away by fees. However, the arguments for both the 'cheap' and 'expensive' options relate to the expectation that the claims will be grouped together.

An RGL spokesman argues a group effort will mean that the only real difference between the claims is cost. “Through the legal work and arguments being shared across groups, it is also very likely that all claimants will either win together or lose together,” they say. “In the win scenario, the only difference between the groups would be how much of the winnings any claimant is then obliged to pay his or her group’s lawyers and funders.”

That said, there are counterarguments to be considered. One argument goes that cheaper claims may not have priced in enough shared costs. If it struggles under the strain of the extra costs, a firm could effectively pull out of the process and sell its book of customers to another claim. The investors who have been transferred may then find themselves in a claim with higher fees. In a very extreme and rare scenario a firm could end its claim, leaving investors in the lurch and potentially unable to join a different claim. It should be noted that RGL says it is “comfortable” with its cost structure.

Another important thing to check is whether a firm has investors funding the action and 'after the event' insurance to cover the costs of a possible loss. This is to ensure that you are not saddled with the bill if the claim is unsuccessful. Leigh Day and Harcus Parker both say they have funders and insurance. RGL says it has pre-action funding for now and will have insurance and funding to trial in time for issuing proceedings.

Link or Hargreaves?

One other big decision for investors is whether to choose a claim focused purely on Link, or one that targets both Link and Hargreaves Lansdown.

Claims against Link seem to be seeking legal simplicity. Leigh Day, for example, argues that it simply needs to “show that Link’s failure to comply with the FCA regulations and protect investors’ interests led to the suspension of the fund and consequent loss”. By contrast, the firm argues that a Hargreaves claim would rely on first showing that Woodford Equity Income had breached liquidity rules and then proving that Hargreaves knowingly made untrue statements about the fund in its best buy lists.

An RGL spokesperson says the firm firmly believes its approach of targeting both is “the best strategy for investor claimants to make as full a recovery of their losses as possible”, adding that this is supported by the view of an eminent QC. The website for RGL’s claim argues that Hargreaves appeared to know of liquidity issues in the fund from November 2017, adding: “This brings into acute focus the level of knowledge and information to which Hargreaves Lansdown’s senior management was privy from this time.”

Hargreaves Lansdown declined to comment. A Link spokesman said: “The key responsibility of Link Fund Solutions in its role as ACD of the LF Equity Income fund was and is to act in the best interests of all investors in the fund. Link takes this and its other responsibilities very seriously and considers that it has acted at all times in accordance with applicable rules, as well as in the best interests of all investors, and it will continue to do so.”