FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this Final Notice, the Authority hereby requires Link Fund

Solutions Limited (“Link”) to pay, pursuant to section 384(1) of the Act, restitution

of £298,403,919, or such lower sum as may be payable under a scheme of

arrangement, to the LF Woodford Equity Income Fund ("WEIF") for the benefit of

current unitholders (“Relevant Investors”). This sum reflects losses suffered by

Relevant Investors as a result of contraventions by Link of Principle 2 and Principle

6 of the Principles for Businesses.

1.2.
The Authority considers that, in addition, these contraventions would merit the

imposition of a significant financial penalty. Had it not been for the matters outlined

below, the Authority would have proposed to impose on Link, pursuant to section

206 of the Act, a financial penalty of £50,000,000 (which, in the event of

settlement, could have been reduced to £35,000,000). Link has not agreed to the

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level of financial penalty and could have contested the amount proposed by the

Authority.

1.3.
Link agreed to settle the case by implementing a scheme of arrangement, under

which restitution will be payable (“the Scheme”). The Scheme, which has been

subject to a court-approved process including a vote by Relevant Investors, will

involve the disposal by Link of substantially all of its value and, because it includes

an additional significant voluntary contribution from Link’s ultimate parent, Link

Administration Holdings Limited (“LAHL”), will result in the payment of restitution

of up to £230 million, significantly above what would otherwise be available to Link.

The Authority is satisfied that the additional imposition of a financial penalty would

reduce the amount of restitution available to be paid by Link. As a result, instead

of imposing a financial penalty, the Authority hereby publishes a statement of Link’s

misconduct, pursuant to section 205 of the Act, in the form of a Final Notice.

2.
SUMMARY OF REASONS

2.1.
The Authority considers that Link failed to act with due skill, care and diligence in

carrying out its role as Authorised Corporate Director (“ACD”) of the WEIF, and

thereby breached Principle 2 and Principle 6 of the Authority’s Principles for

Businesses.

2.2.
The WEIF is an open-ended undertaking for collective investment in transferable

securities (“UCITS”) fund authorised by the Authority. As a UCITS fund, the WEIF

was subject to a detailed regulatory framework designed to offer protection to

unitholders. Investors should be able to have confidence that the UCITS they

invest in will be managed in accordance with the regulatory framework. That is

particularly important where funds are marketed at a range of investors, including

consumers who are investing for themselves and are often heavily reliant upon

those funds being managed in an appropriate way. The WEIF attracted a range of

investors including consumers, as well as professional investors. The WEIF held a

substantial sum of investments at the time of its suspension, with a value of just

over £3.5 billion at the time.

2.3.
For funds where investors expect to be able to withdraw their investments at short

notice, it is particularly important that liquidity is appropriately managed to ensure

that this can occur. Although there are a range of ways in which liquidity can be

monitored and managed, the practices adopted must, at all times, be appropriate

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to the fund. In particular, investors are entitled to expect that ACDs will diligently

manage liquidity to ensure that:

(a)
Redemptions can be serviced in accordance with the redemption policy

applicable to the relevant fund;

(b)
Unitholders will be treated equally, and in particular that unitholders should

not be subject to disadvantage for remaining in the fund should other

unitholders redeem; and

(c)
There is a prudent spread of risk in the fund.

2.4.
Link was the ACD of the WEIF from the fund’s inception in May 2014. However,

over the period from 31 July 2018 until the WEIF was suspended on 3 June 2019,

Link failed to comply with its regulatory obligations as ACD in respect of liquidity.

In particular:

(a)
The WEIF’s liquidity profile was unreasonable and inappropriate in light of

the redemption policy in the fund prospectus which allowed investors to

redeem their investment within 4 days. However, Link failed to take

adequate steps to deal with the problem.

(b)
The metrics used to measure liquidity contemporaneously (including stress-

testing) were unreasonable and inappropriate.

(c)
Link failed to properly supervise Woodford Investment Management Limited

(“WIM”), the investment manager of the WEIF.

(d)
The WEIF held securities which were originally unquoted but later admitted

to eligible markets. However, there were no arm’s length market dealings

in any of Sabina Estates Limited, Ombu Group, Industrial Heat, LLC and

Benevolent AI (the “TISE securities”), and only one trade recorded for any

of the TISE securities. The securities were valued by Link using fair value

pricing (“FVP”) at all stages, even after their listing. The WEIF thus held

assets which remained illiquid even after listing and this increased the risks

of liquidity issues arising.

2.5.
Following a request from Kent County Council (“KCC”) to redeem its holding in full

a decision was taken on 3 June 2019 by Link to suspend dealings in the fund. KCC

was, at the time the largest single investor in the WEIF. The WEIF was

subsequently put into liquidation without reopening, meaning that investors’

holdings in the fund could not be redeemed. Since being suspended, the value of

many of the assets held within the WEIF has reduced significantly, meaning that

investors have received, or will receive, significantly less than the value of their

investments at the point of suspension. The Authority considers that Link’s failings:

(a) materially contributed to the risk that suspension would be required; and (b)

placed those investors who did not redeem prior to the point of suspension at a

disadvantage. The ‘first mover advantage’ for those redeeming earlier was

exacerbated by the failure of Link to adequately monitor how redemptions were

being met by WIM and to help prevent further deterioration of liquidity. More liquid

assets were sold to meet redemptions exacerbating the decline in liquidity. Link

could have managed liquidity issues which arose in a number of ways, including

requiring assets to be sold down equally across the liquidity profile, referred to as

vertical slicing. This would have prevented a disproportionate sale of the most

liquid assets. Had vertical slicing been required by Link, the WEIF’s liquidity would

not have deteriorated in the manner in which it did.

The WEIF’s liquidity profile was unreasonable and inappropriate

2.6.
The unreasonable and inappropriate liquidity profile of the WEIF permitted by Link

is illustrated by the following facts and matters:

(a)
Link set thresholds which would trigger action if liquidity deteriorated below

what they had defined as an acceptable level. Had Link adopted reasonable

and appropriate monitoring metrics (which it failed to do), some of its own

triggers would have been breached in April and May 2018, and continuously

from July 2018 at the very latest.

(b)
Even on Link’s own contemporary calculations, it was or ought to have been

clear that the liquidity of the WEIF was deteriorating. Indeed, from as early

as 20 November 2017, it was noted internally in Link that “we need to now

acknowledge that Woodford is in need of better management of its liquidity”.

Based on assessments conducted, had Link adopted reasonable and

appropriate monitoring metrics (which it failed to do), its trigger threshold

for the WEIF’s most illiquid assets would have been breached in April and

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May 2018 and then continuously from July 2018. By 1 September 2018 Link

was referring in communications to WIM to “the need to improve the overall

liquidity profile of the fund”.

(c)
Other liquidity metrics which were not contemporaneously applied, but

which the Authority has calculated as a cross-check, also show that the

liquidity of the WEIF was deteriorating and imprudent.

(d)
Based on assessments conducted, from 1 September 2018 onwards the

WEIF would not have been able to continue to meet redemptions in stressed

but plausible scenarios.

(e)
The WEIF was an outlier among comparator funds. From mid-2018 until its

suspension, it was less liquid than the least liquid such comparable fund in

a number of respects. By way of example, from July 2018 to the time of

suspension on 3 June 2019, the proportion of the WEIF’s securities that were

liquidable within 7 days deteriorated from 18% to 8%, which was

significantly lower than the bottom ranked fund.

2.7.
Despite the above, and as summarised below, Link did not take reasonable steps

to adequately supervise WIM and ensure that a reasonable and appropriate liquidity

framework was adopted.

Link’s metrics and methodologies used to measure liquidity were

unreasonable and inappropriate

2.8.
In particular:

(a)
Link assumed a participation rate of 100% when applying certain of its

liquidity metrics. A 100% participation rate assumes that the entire volume

of a security which was traded on a given day could be sold without affecting

the price of that security. Link asserted that this optimistic assumption was

offset by the requirement for all of the holding in that security to be sold

before it could be included in the relevant liquidity time period. However,

this was not the case in practice and the use of a 100% participation rate

was unrealistically optimistic and it led to an unjustifiably positive

assessment of the WEIF’s liquidity. Had a more reasonable and appropriate

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participation rate been adopted, actions would have been triggered under

Link’s own liquidity thresholds.

(b)
The liquidity thresholds were inappropriate in light of the redemption policy

and metrics adopted. They were set in such a way that action would only be

required when it was already too late.

(c)
Link derived the data with which it calculated the WEIF’s liquidity from

inappropriate data sources. In particular, the data which it used reflected

the total volume of shares advertised (and not necessarily traded) on one

specific exchange, and not (as should have been the case) the total volume

of shares traded across all exchanges on which the security is quoted.

(d)
Link did not adequately stress-test the WEIF. In particular, it did not test for

certain extreme but plausible scenarios. Had Link done so, it would have

realised that the WEIF lacked the liquidity to withstand such scenarios.

2.9.
Link’s failure properly to measure the liquidity of the WEIF exposed investors to

unnecessary risk and led to a difference in treatment between those investors that

redeemed their unitholding and those who remained in the WEIF after November

2018. Had Link properly calculated the liquidity in the WEIF, the true scale of the

liquidity problem summarised above would have been known (not least because

thresholds would have been crossed). Further, had appropriate thresholds been

adopted, action in relation to liquidity would have been triggered earlier. Because

neither happened, the WEIF’s liquidity was allowed to deteriorate, thereby

materially contributing to the risk that suspension would be required and placing

investors who did not redeem prior to the point of suspension at a disadvantage.

Link’s failure to properly to supervise WIM

2.10. Link communicated to WIM as early as November 2017 that the WEIF’s liquidity

profile was becoming unbalanced and that action needed to be taken. However, it

continued to deteriorate, with there being a lack of “vertical slicing” of the portfolio

as redemptions continued. Subsequently:

(a)
Link imposed liquidity limits in May 2018 as a backstop position to prevent

the portfolio from deteriorating any further. However, those limits came to

be treated (by both Link and WIM) as an acceptable framework within which

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the WEIF was to be run, rather than urging the fund to rebalance the

portfolio away from the inappropriate and unreasonable liquidity profile

described above.

(b)
In October 2018, Link approved a change in the liquidity monitoring

framework, at WIM’s instigation. That change was approved despite the fact

that:

a.
Metrics which had hitherto been part of the monitoring programme

and which were identifying, and were likely to continue (and did in fact

continue) to identify, breaches of liquidity thresholds, were

abandoned.

b.
The new monitoring framework was less prudent (in the sense that it

did not identify the liquidity profile as breaching thresholds, whereas

the previous framework did), but the relevant thresholds were not

adjusted downwards to take this into account.

(c)
From September 2018 onwards, Link repeatedly communicated to WIM that

there was a need to improve the overall liquidity profile of the WEIF.

However, Link failed to ensure that the necessary actions were taken.

2.11. The failure to take appropriate steps to control WIM and ensure that the liquidity

in the WEIF was properly managed meant that the unreasonable and inappropriate

liquidity profile of WEIF was not corrected.

TISE Securities

2.12. Although ACDs are not usually expected to be involved in an underlying asset's

corporate actions, including listing on exchange, Link failed to give consideration to

the potential implications for the WEIF’s liquidity profile where businesses which

the WEIF had holdings in announced an intention to convert from unlisted status to

becoming listed on an exchange. This included four businesses whose assets were

held by the WEIF, which announced that they intended to list relevant securities on

the International Stock Exchange, a stock exchange headquartered in Guernsey

(“TISE”). Details of the process by which this happened are set out below;

(a)
The WEIF invested in a number of companies that were unquoted

(“Unquoted Securities”), which meant that the relevant securities they

issued were not listed and traded on an exchange. Between October 2014

and October 2015, the WEIF invested in the TISE securities, which were all

Unquoted Securities, prior to subsequent listing.

(b)
In August 2017, WIM entered a moratorium on any further investments in

Unquoted Securities, as the WEIF was approaching the 10% limit on

Unquoted Securities, permitted under COLL 5.2.8R (the “10% limit”). By the

end of November 2017, the percentage of Unquoted Securities held by the

WEIF stood at 9.82%.

(c)
Unknown to Link, WIM notified each of the TISE companies about the issues

arising from the funding moratorium as well as the WEIF nearing the 10%

limit. WIM was unable to provide further funding to the TISE companies

unless the securities held by the WEIF were listed, which meant they would

no longer be covered by the 10% limit. Subsequently, each of these four

companies listed shares in their companies on TISE.

(d)
Notwithstanding their listing, prior to the suspension of the WEIF on 3 June

2019, there were no arm’s length market dealings in any of the TISE

securities, and only one trade recorded for any of the securities. Link did

not change its treatment of the TISE securities from a liquidity perspective,

being aware that the relevant listings were likely to be, at most, thinly

traded. However, Link failed to give sufficient consideration to the potential

implication of the WEIF holding what it knew would be illiquid assets, in

addition to those within the 10% limit. By not adequately considering the

implications of the various listing on TISE, Link failed to sufficiently

recognise the risks of increased levels of illiquid assets being held within the

Fund. This increased the risks of liquidity issues arising.

2.13. The Authority’s operational objectives include securing an appropriate degree of

protection for consumers and protecting and enhancing the integrity of the UK

financial system. Link’s failings threatened these objectives, resulting in significant

losses to investors and an adverse impact on confidence in the fund management

sector.

2.14. Link (with the support of a voluntary contribution from its ultimate parent company,

LAHL) has voluntarily agreed to contribute, without admission of liability, up to

£230 million towards restitution for investors who held investments in the WEIF at

the point of suspension on 3 June 2019. The Authority is satisfied that imposition

of a penalty would reduce the amount of restitution available and, on the basis of

the contribution made, does not seek to apply or enforce the penalty that would

otherwise have been imposed. But for the restitution issues, the Authority would

have imposed a financial penalty on Link in the amount of £35,000,000 pursuant

to section 206 of the Act, for breaches of:

(a)
Principle 2 (skill, care and diligence); and

(b)
Principle 6 (fair treatment of customers).

2.15. The Authority considers that these contraventions have resulted in unfair treatment

and consequent losses being incurred by investors in the WEIF who did not redeem

their investments before its suspension on 3 June 2019. This is because Link

allowed redemptions to be made by realising more liquid assets, leaving those who

continued to hold investments in the WEIF at the time of its suspension with an

unfairly disproportionate share of less liquid assets whose previously recorded

values in certain cases could not ultimately be realised upon sale. The Authority

considers that these losses can most appropriately be assessed by calculating the

additional amounts which those who remained invested in the WEIF at the time of

its suspension would have received had the proceeds of the sale of assets from

November 2018 to the time of suspension been divided equally between all

investors (rather than being used only to meet redemptions). Using this approach,

the Authority has calculated that those invested in the WEIF at the time of

suspension would have received an additional £298,403,919.

2.16. The Authority considers that it would be just to require Link to pay this sum of

money as restitution to the WEIF (which will thereby benefit the Relevant

Investors). However, this sum significantly exceeds the assets available to Link. As

a result, for the purposes of settling this action, Link agreed to propose the Scheme,

pursuant to the terms of the Companies Act 2006, to Relevant Investors. Under the

terms of the Scheme, Link has agreed to pay all its available assets to the WEIF,

together with a contribution by LAHL of approximately £60 million. This will result

in restitution of up to £230 million being paid to Relevant Investors. The Scheme

was subject to a vote by Relevant Investors (in which 93.7% of those voting voted

in favour) and to sanction by the High Court. The Authority therefore requires Link

to pay restitution in the sum of £298,403,919, or such lesser sum as may be

payable under the terms of the Scheme.

2.17. The Authority acknowledges the cooperation shown by LAHL and Link and the

substantial contribution that LAHL has voluntarily agreed to provide towards

restitution. For the avoidance of doubt, no criticism is made of anyone except Link

in this Notice.

3.
DEFINITIONS

3.1.
The definitions below are used in this Notice:

“the Act” means the Financial Services and Markets Act 2000;

“ACD” means an Authorised Corporate Director of a fund;

“ADTV” means the Average Daily Traded Volume of a security, which is the average

number of shares traded per day on an exchange over a certain period of time;

“AFM” means Authorised Fund Manager;

“AUM” means assets under management, which is a total value of a fund’s assets;

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct Authority;

“Benevolent” means BenevolentAI Limited;

“COLL” means the Collective Investment Schemes sourcebook, part of the

Handbook;

“DEPP” means the Decision Procedures and Penalties Manual, part of the

Handbook;

“EG” means the Authority’s Enforcement Guide;

“Full Allocation Approach” means a liquidity risk monitoring approach in which a

security was assigned to a time bucket based upon the number of days it was

expected to take to dispose of all shares held by the fund in that security;

“FVP” means Fair Value Pricing, a means of estimating the value of an asset where

no market value is readily ascertainable;

“Handbook” means the collection of regulatory rules, manuals and guidance issued

by the Authority as in force during the Relevant Period;

“IOSCO” means the International Organization of Securities Commissions, an

association of national securities and financial regulators from over 100 countries;

“Industrial Heat” means Industrial Heat, LLC;

“KCC” means Kent County Council;

“KIID” means Key Investor Information Document;

“LAHL” means Link Administration Holdings Limited;

“Large Cap” means securities with a market capitalisation of greater than or equal

to US$10 billion;

“Linear Allocation Approach” means a liquidity risk monitoring approach in which a

security was assigned to numerous time buckets based upon the number of shares

in the security that were expected to be disposed of each day;

“Link” means Link Fund Solutions Limited, known until 6 November 2017 as Capita

Financial Managers Limited (FRN 119197);

“Mid Cap” means securities with a market capitalisation of between US$1 billion

and US$10 billion

“NAV” means Net Asset Value, the value of a fund’s assets minus its liabilities;

“NEX” means the NEX Exchange Growth Market (which has since been renamed as

Acquis Stock Exchange), a stock exchange headquartered in England;

“Ombu” means Ombu Group;

“Participation Rate” means an estimate of the percentage of ADTV of a security that

the WEIF could sell in one day without having a significant impact on the price of

that security;

“Principle” means one of the Principles for Businesses, rules set out in the section

of the Handbook entitled “Principles for Businesses” (PRIN);

“RCR” means the Redemption Coverage Ratio, a ratio based on Link’s liquidity

metrics which measured the ability of the WEIF to meet redemption requests;

“Relevant Investors” means those persons beneficially holding units in the WEIF

at the time of its suspension on 3 June 2019 (or their assignees);

“the Relevant Period” means the period from 1 May 2017 to 3 June 2019;

“Sabina” means Sabina Estates Limited;

“the Scheme” means the scheme of arrangement, proposed by Link under the

terms of the Companies Act 2006 and sanctioned by the High Court on 9 February

2024;

“Small Cap” means securities with a market capitalisation of less than or equal to

US$1 billion;

“the Statistical Model” means the statistical model used by the Authority to assess

the liquidity of the WEIF over the Relevant Period, as described in paragraphs 4.104

to 4.105 below;

“SYSC” means the part of the Handbook entitled Senior Management

Arrangements, Systems and Controls;

“TISE” means the International Stock Exchange, a stock exchange headquartered

in Guernsey;

“the TISE companies” mean Benevolent, Industrial Heat, Ombu and Sabina;

“the TISE securities” mean securities in the TISE companies;

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);

“UCITS” means an undertaking for collective investment in transferable securities,

as defined in section 236A of the Act;

“Unquoted Securities” means transferrable securities which are not listed and

traded on an eligible market;

“the WEIF” means the LF Woodford Equity Income Fund (called the CF Woodford

Equity Income Fund between 2014 and 2017 and, since 2018, the LF Equity Income

Fund) (FRN 635902); and

“WIM” means Woodford Investment Management Limited (FRN 745433).

4.
FACTS AND MATTERS

SECTION A: BACKGROUND

4.1.
Link has been authorised by the Authority since 2001, with permission to manage

funds, including UCITS. The WEIF is a sub-fund of the LF Woodford Investment

Fund, an open-ended UCITS scheme, authorised by the Authority and opened in

May 2014.

4.2.
Link was the ACD of the WEIF from the fund’s inception. The ACD’s role was to

manage and administer the WEIF in accordance with the functions set out in COLL

6.6.3. Broadly, an ACD maintains regulatory documentation (including the

Prospectus and the Key Investor Information Document (“KIID”)), maintains

operational relationships with key stakeholders (including shareholders and the

Authority), values and ensures accurate pricing of the fund’s assets, and monitors

relevant activities of the investment manager (WIM). As the WEIF’s ACD, Link had

regulatory responsibilities for the management of the fund. Link monitored and

oversaw the WEIF and was required to ensure that it acted in the interests of all

investors.

4.3.
The ability of fund investors to redeem the value of their investments at short notice

can be of particular importance to them. The WEIF’s terms and conditions provided

that investors were able to redeem their investments and be repaid within 4 days.

However, as outlined in more detail below, many of the assets held by the WEIF

could not be liquidated in such a short timeframe or could only be liquidated at

significantly reduced prices. This gives rise to liquidity risk – the risk that, while a

fund may hold assets of sufficient value to cover its liabilities (including redemption

requests), it is unable to access liquid funds to meet these liabilities in the required

timeframes.

4.4.
It is the responsibility of the ACD to manage this liquidity risk. Liquidity risk will

tend to be greater if a fund holds significant proportions of less liquid assets – that

is those assets which take longer to liquidate – and may increase in the event of

higher than expected net redemption requests. Meeting redemption requests by

liquidating more liquid assets will generally lead to a deterioration in the liquidity

profile of a fund (since this results in it holding a higher proportion of less liquid

assets). This approach may lead to a position where the fund cannot meet

redemption requests or can only do so by liquidating assets at significantly reduced

values. This risks significant prejudice to those investors continuing to hold

investments in the fund since they may be unable to access their funds and/or the

value of their investments may reduce significantly.

4.5.
Managing liquidity risk is therefore a key function of an ACD. Although there are a

range of ways in which liquidity can be monitored and managed, the practices

adopted must, at all times, be appropriate to the fund. In managing liquidity risk,

the ACD is obliged to ensure that the fund complies with the Authority’s rules,

including specific threshold rules, for example that no more than 10% of the

property of a UCITS scheme may be invested in Unquoted Securities, but also

qualitative rules such as that the UCITS scheme aims to provide a prudent spread

of risk (which includes liquidity risk) and that the liquidity profile is appropriate to

the fund’s redemption policy. While an ACD may delegate the investment

management of a fund to an investment manager, the ACD remains responsible for

ensuring that liquidity risk is managed appropriately.

4.6.
WIM had two roles: it was the Sponsor of the WEIF and the WEIF’s Investment

Manager. As Sponsor, WIM defined the principal features of the WEIF and engaged

Link as ACD. WIM provided Link with all necessary documentation to establish the

fund, and maintained those documents throughout the life of the fund. Link

delegated the role of Investment Manager to WIM. As Investment Manager, WIM

retained responsibility for discretionary investment management and advisory

services, with a view to achieving the WEIF’s investment objectives as permitted

by regulations and the Prospectus. Link did not involve itself in deciding which

particular investments were bought, held or sold, including which assets of the

WEIF would be sold in order to meet redemptions. It did not require the WEIF to

vertically slice the sale of investments across the liquidity profile, which is a

recognised way of ensuring consistent liquidity is achieved.

4.7.
The principal document that set out the investment objective and remit was the

prospectus, accompanied by the KIID. Both the Prospectus and the KIID stated

that the WEIF may invest in unlisted companies and overseas entities.

4.8.
The WEIF made its first investment in Unquoted Securities in June 2014 (the month

after the WEIF was launched). The WEIF made 68 investments in a number of

Unquoted Securities during the lifetime of the fund. The value of Unquoted

Securities that is permitted in a fund is 10% of its NAV, as set out in COLL.

4.9.
The chart below illustrates the proportion of the WEIF’s NAV which comprised

Unquoted Securities over its lifetime.

4.10. By the end of June 2014, the total NAV of the WEIF reached nearly £1.7 billion.

From June 2014 to May 2017, the WEIF continued to attract investors and the fund

grew to a peak of almost £10.2 billion by May 2017. Between 2 June 2014 and 31

May 2017, the WEIF generally outperformed the FTSE All-Share Index.

4.11. In April 2017, WIM began to implement a refocus of the WEIF’s investments from

global companies to UK focused companies, which were frequently smaller, less

well capitalised companies. From June 2017 onwards, the WEIF generally

underperformed against the market benchmark.

Chart 2

4.12. Owing to poor investment performance and persistent investor withdrawals, the

WEIF’s NAV dropped from £10.08 billion at the end of June 2017 to just over £3.5

billion by the end of May 2019.

Chart 3

The AUM, NAV and fund in/outflows of the WEIF from launch until its suspension

4.13. There was a wide range of types of investors in the WEIF, including significant levels

of retail investors, investing directly or more generally via platforms or being

invested indirectly via pension funds. Whilst there were other investors with

significant holdings in the WEIF, Kent County Council (“KCC”) was one of the largest

single investors in the WEIF throughout the Relevant Period. Its holding was valued

at between £325 million (3.2% of NAV) in June 2017 and £237 million (6.5% of

NAV) at end of May 2019.

4.14. On 31 May 2019, KCC informed WIM that it would be redeeming its entire position

in the WEIF. Following the instruction to sell being relayed to Link on the morning

of 3 June 2019, Link made the decision to suspend the WEIF from 3 June 2019,

meaning that all remaining investors were unable to redeem their units.

4.15. On 15 October 2019, Link wrote to investors in the WEIF that having considered

the future of the fund, it had decided not to re-open the fund and to wind it up as

soon as practicable.

SECTION B: THE LIQUIDITY FRAMEWORK USED FOR THE WEIF

4.16. The liquidity position of the WEIF was assessed and monitored by Link using several

different metrics. In particular:

(a)
Liquidity Buckets;

(b)
T+ Metrics; and

(c)
Redemption Metrics.

4.17. The core features of each of these types of metrics, and how they were altered by

Link over time, are addressed immediately below.

The Liquidity Bucket methodologies

Overview of the model

4.18. One of the primary methods by which Link assessed the liquidity of the WEIF was

by “liquidity bucketing”. Liquidity buckets grouped the fund’s assets by reference

to the amount of time it would take to sell the asset. These buckets ranged from

highly liquid (where the security could be sold relatively easily and quickly) to

illiquid, frequently unlisted securities (where it would take a relatively long time to

sell the security).

4.19. The time taken to liquidate a security was typically termed “T+” the relevant time

period. For example, an asset that Link expected to be able to sell within one day

without having a significant impact on its price would be categorised as “T+1”. The

bucket in which a security was categorised was determined by how quickly the

shares held in that security could be liquidated. This was calculated as a product

(a)
the Average Daily Traded Volume (“ADTV”) of the security, which was the

average number of shares traded per day on an exchange over a certain

period of time; and

(b)
the Participation Rate of the security, which reflected an estimate of the

number of shares of that security that the WEIF could liquidate in one day,

without having a significant impact on the price of that security.

4.20. During the time that the WEIF was operational, the following three versions of

liquidity bucketing were used to assess the fund’s liquidity, all of which are

summarised below:

(a)
the Five Category Model (used by Link for the WEIF from the inception

of the fund until January 2018, this model was the standard model used

by Link across all the other funds for which it was an ACD);

(b)
the Initial Four Bucket Model (used by Link specifically for the WEIF from

January 2018 until October 2018); and

(c)
the Revised Four Bucket Model (used by Link specifically for the WEIF

from October 2018 until the fund’s suspension).

The Five Category Model

4.21. Between May 2017 and January 2018, Link assessed the WEIF’s liquidity by

allocating securities into five categories, based on their time to liquidate, as follows:

(a)
T+1;

(b)
T+5 (referred to by Link as “mini liquidity”);

(c)
T+2 >< T+7;

(d)
Illiquid rump (>T+7 ); and

(e)
Cash.

4.22. This model was Link’s standard liquidity monitoring model used to monitor the

liquidity of all funds that it managed on a daily basis. It was described by Link to

the Authority as “conservative” due to the way securities were allocated to the

relevant buckets. In particular, the Five Category Model allocated securities to

appropriate liquidity categories assuming a 100% market Participation Rate (except

for the “mini liquidity” category, which assumed a 20% Participation Rate) and

based on when the entire holding could be sold (the “Full Allocation Approach”).

According to Link, the conservative nature of the requirement for a full position to

be sold was offset by the 100% Participation Rate which assumed that the fund

would be able to utilise the entire daily trading volume of the security.

4.23. The issue of the 100% participation rate formed subject of a comment in a report

issued to Link by a skilled person on 19 October 2018 in relation to various issues

regarding the activities of Link. The skilled person observed in the report about the

100% market participation rate being an optimistic assumption in the context of a

sell off. It also noted that the participation rate was outside normal market

practice, where a 20-30% participation is typically assumed. The skilled person

recommended in the report that Link revisit the market participation rate of 100%.

The skilled person referenced that they had observed that the typical assumption

is 10% in a stressed scenario and 20-30% in good market conditions. Despite this

recommendation, no changes were made to the rate used.

4.24. The Five Category Model used the lower of the previous 5 or 20-day ADTV for the

relevant security on a rolling basis, using data from the Primary Exchange on which

the security was listed.

4.25. Stress testing of the WEIF was considered as part of Link’s liquidity monitoring in

Autumn 2016. These initial stress tests were conducted in November and December

2016. Link described the stress tests as being based on trading volumes, and then

on the cost to investors if large redemptions were made from the fund.

Subsequently, stress testing for the Five Category Model (in the pre-September

2018 period) featured Link reducing the ADTV for Large Cap stocks by 20% and

Small Cap stocks by 40%. This daily stress test was an approach Link used across

all funds which it managed.

4.26. Link’s Risk Policies Document set out Link’s liquidity risk criteria for funds with

liquidity concerns. The criteria was based on the percentage of a fund’s NAV which

could be liquidated within 5 days (T+5). It was set at different levels for ‘Normal

Conditions’ and for ‘Shock periods and Stress testing’. In particular, for Large Cap

funds, if T+5 was less than 60% of the fund’s NAV in Normal Conditions or less

than 40% in Shock periods and Stress testing, the fund was deemed to have

liquidity concerns. During the Relevant Period the WEIF did not hold the requisite

percentage of T+5 assets to meet the 60% threshold, and as a consequence was

subject to enhanced daily monitoring by Link.

4.27. In January 2018, Link amended the Five Category Model that was used for the

liquidity monitoring of the WEIF, and changed it to an Initial Four Bucket Liquidity

Model as set out below:

(a)
Bucket 1: T+1 - T+7 (i.e. positions that could be liquidated in 7 days or

less).

(b)
Bucket 2: T+8 - T+30.

(c)
Bucket 3: T+31 - T+180.

(d)
Bucket 4: T+181 - T+365+.

4.28. The Initial Four Bucket Model continued to assume a 100% Participation Rate and

only considered ADTV data from the primary exchange on which the security was

traded. However, instead of the lower of the previous 5 and 20 day average trading

volumes (as used in the Five Category Model), Link used the lower of the 5 day and

20 day average trading volume as at March 2017.

4.29. Link explained to the Authority that the move to the March 2017 trading volumes

from the rolling basis as a standard reference point across the funds for which it

was ACD was aimed at minimising the market fluctuations by removing an element

of seasonality in market volumes. There were also two sets of data analyses

produced under this model: “True Data Analysis” and “Adjusted Data Analysis”,

with the former using the ADTV as used in the Five Category Model and the latter

based on trading volumes as at March 2017. The effect of changing the reference

point for trading volumes was that fluctuations in the WEIF’s liquidity appeared to

have been smoothed.

4.30. Although the Five Category Model was the standard liquidity measure that Link

used for all other UCITS funds for which it was the ACD, the Initial Four Bucket

Model was a “bespoke control mechanism” developed by Link for use in relation to

the WEIF only.

4.31. In May 2018 Link introduced the following limits under the Initial Four Bucket

Model: a limit of 35% of NAV in Bucket 4; and a limit of 70% of NAV in Buckets 3

and 4 combined.

4.32. Link continued daily stress testing in accordance with the testing for the Five Bucket

model as described above.

The Revised Four Bucket Model

4.33. In October 2018, the Revised Four Bucket Model was subsequently adopted as

Link’s primary method of monitoring the WEIF’s liquidity. The change occurred after

discussions between WIM and Link, in which WIM raised concerns with Link in

September 2018 on the suitability of the Initial Four Bucket methodology (in

particular about the use of seasonally adjusted volumes fixed as at March 2017 for

calculating bucket positions).

4.34. The bucket composition and allocation remained the same as the Initial Four Bucket

Model with two new adjustments. The first was that the ADTV period changed from

the lower of 5 and 20-day ADTV at March 2017 to a 12-month rolling average. The

former methodology had been viewed by Link as “potentially unreliable” due to its

reliance on average trading volumes over a short period, at a fixed point of time.

The adjustment was, by Link’s explanation, aimed at giving a fairer reflection of

the volumes traded over a longer time horizon. Link also stated that the changes

made the Four Bucket Model “more responsive to changes in portfolio composition

as well as secular changes in the market with the result that the liquidity monitoring

became more precise”.

4.35. The second adjustment was that under the revised methodology, ADTV was

intended to capture trades from all exchanges where a security was traded, as

opposed to the Initial Four Bucket Model which only captured trades from primary

exchange and therefore did not consider all potential pools of liquidity.

4.36. The Revised Four Bucket Model implemented further triggers and limits on the

percentage of the WEIF’s holdings in each bucket. In particular:

(a)
The triggers required the launch of an investigation into the cause of

the trigger being crossed, and an update to the contingency plan, if

Bucket 4 increased above 30%, Buckets 3 and 4 combined increased

above 65%, or Bucket 1 decreased below 8% of NAV.

(b)
The limits required the implementation of the contingency plan if Bucket

4 increased above 35%, Bucket 3 and 4 combined increased above 70%

(with these two limits having already been introduced under the Initial

Four Bucket Model, as noted above), or if Bucket 1 decreased below 5%

4.37. For stress testing, Link tested the impact of sudden 10%, 15% and 20%

redemptions of the portfolio, which Link described as presupposing an extreme

approach, meeting redemptions by selling only the most liquid assets until these

were exhausted, before moving on to the next level of liquidity.

4.38. The assumptions underpinning each of the three bucketing models described above

can therefore be summarised as follows.

Figure 1- Summary of the assumptions underpinning the Five Category Model, the Initial

Four Bucket Model and the Revised Four Bucket Model

Key inputs
Five Category
Model

January
2018
to

ADTV
exchange data

Primary
exchange

Primary exchange
All exchanges

ADTV period
The lower of the
previous 5 and
20 day average
daily
trading

volumes

Presented on two bases:
(i) unspecified, described as
"the average daily market
volume, as obtained from
Bloomberg" (referred to in the
Link Liquidity Reports as the
“True data”)95; and
(ii) the lower of the 5 day and
20 day average volume as at
March 2017 (referred to in the
Link Liquidity Reports as the
“Adjusted Data”)

12 month rolling
average

i) 100% for all
categories other
than the “mini-
liq” category

ii) 20% for the
“mini-liq”
category

Allocation
method

T+ Metrics

4.39. In addition to the liquidity bucketing model, Link analysed WEIF’s liquidity by

reference to the T+ Metrics which measured the proportion of the fund that was

liquidable within a certain number of days, expressed as a percentage of the NAV

of the fund. Similar to the bucket models, the T+ Metrics are expressed as “T+”

and a number of days, with T+5, for example, reflecting the proportion of the

WEIF’s NAV which could be liquidated within five days.

4.40. In the pre-September 2018 period Link used a T+5 metric which formed part of the

Five Category Model. It used data from the primary exchange, with ADTV

calculated as the lower of the previous 5 or 20 day trading volume, a 100%

Participation Rate, and the Full Allocation Approach. It was also stress tested and

monitored in accordance with the Five Category Model described above.

4.41. In the post-September 2018 period, following the adoption of the Revised Four

Bucket Model, Link used the T+1, T+5 and T+20 Metrics which were introduced as

a “control mechanism” to supplement the existing redemption monitoring

procedures. These T+ Metrics used data from all exchanges, ADTV calculated as a

12-month rolling average, a 25% Participation Rate and a Linear Allocation

Approach, which assigned a security to a T+ time period based on the amount that

could be sold during that time period. This meant that the same security may

appear in different T+ portions of the portfolio. The Redemption Coverage Ratios

(see below) were produced using these outputs, and had specific triggers and limits

associated with them. These metrics looked at liquidity which was immediately

available in the WEIF.

The Redemption Metrics

4.42. Link also monitored the WEIF’s liquidity through the use of the Redemption Metrics

which measured the ability of the fund’s assets to meet its potential liabilities, in

circumstances such as a redemption shock.

4.43. In the pre-September 2018 period, in particular from November 2017, Link used

the Amivest Metric which is an estimate of the cost of selling a portion of a fund in

a single day of trading, based on trading volumes and prices. This measure shows

the potential impact of disposing of a portion of a holding in a particular security

on the price of that holding. Link assessed the price impact of liquidating 5% of the

portfolio, using this measure. This impact, the Amivest Score, was expressed in

basis points (“bps”) which Link tracked against certain thresholds. The threshold

before February 2018 was 50bp and assumed that 100% of each security would be

sold (going from the most liquid down until 5% of the portfolio NAV is liquidated).

After February 2018 the threshold was moved to 30bp under the assumption that

only 5% of each security would be sold. The Link Liquidity Reports did not detail

any contingency plans in the event the Amivest Metrics were to be breached.

Redemption Coverage Ratio (RCR)

4.44. In October 2018, after adopting the Revised Four Bucket Model, Link monitored the

RCR, which was based on Link’s T+1, T+5 and T+20 Metrics and measured the

ability of the WEIF to meet redemption requests.

4.45. The RCR considered the proportion of the WEIF that could be liquidated in 1, 5 and

20 days (as explained in the paragraphs 4.39 – 4.41 above) and divided that by

the average daily redemptions based on the previous 10-day rolling average. For

example, if £18 million could be liquidated in 1 day and the average daily

redemptions over the previous 10 days were £2 million then the 1 Day RCR would

be 9. As with the T+ Metrics, RCR assumed a 25% Participation Rate, an ADTV of

12 months and captured trades from all exchanges.

4.46. Link set several additional triggers and limits based on the RCR. If a trigger was

reached, an ‘event’ was to be launched to investigate the cause and update

contingency plans. If a limit was reached, the liquidity contingency plan was to be

executed. The RCRs had the following limits and triggers:

(a)
1 Day RCR had a trigger of 8 and a limit of 5;

(b)
5 Day RCR had a trigger of 30 and a limit of 25; and

(c)
20 Day RCR had a trigger of 150 and a limit of 120.

4.47. The RCR was stress tested in the same way as the T+ Metrics, by assessing the

percentage of the portfolio realisable in 1 day, 5 days and 20 days after modelling

redemptions of 10%, 15% and 20%. Link explained to the Authority that it also

modelled “… scenarios based on redemptions by the largest discretionary investors

in the fund…” and that “the analysis presupposes an extreme approach, meeting

redemptions by selling only the most liquid assets until these are exhausted, before

moving on to the next level of liquidity.”

4.48. Link also monitored the level of Unquoted Securities in the WEIF. There were two

limits associated with this monitoring. The first limit was at 8.5%. Once this level

was reached, no further investments in new Unquoted Securities were permitted.

The second limit was at 9.5%. At this level, no further investments in Unquoted

Securities were permitted.

4.49. Until September 2018 (subsequent to which it adopted the Revised Four Bucket

Model), WIM used the Initial T+20 Metric as its principal liquidity metric for

assessing the WEIF. During the Relevant Period, Link was aware of WIM’s Initial

T+20 Metric and the underlying input parameters it used.

4.50. The Initial T+20 metric measured the percentage of the WEIF’s portfolio realisable

in 20 days expressed as a percentage of NAV. It was calculated on a daily basis,

assumed a 20% Participation Rate and used a Linear Allocation Approach.

Originally the primary exchange data for ADTV was used, however prior to

September 2018 WIM extended this to include other trading venues. The ADTV

was calculated using the preceding six months trading data.

4.51. WIM set an internal trigger on the Initial T+20 Metric if the amount that could be

liquidated in the 20 day period fell below 25% and a limit if the amount that could

be liquidated fell below 20%.

SECTION C: LINK’S RESPONSE TO THE WEIF’S DETERIORATING LIQUIDITY

4.52. Link was aware that the WEIF’s liquidity was deteriorating throughout the Relevant

Period, but did not effectively communicate these problems to WIM; and, insofar

as Link did communicate them, it did not ensure that they were acted upon. Link

also presided over changes to the liquidity monitoring framework which were

adopted without proper justification.

4.53. Further, as set out in Section D below, Link was aware that the WEIF held a high

percentage of Unquoted Securities Link failed to give sufficient consideration to the

potential implications for the WEIF’s general liquidity, but did not ensure that WIM

acted upon this concern. However, Link failed to give sufficient consideration to

the potential implication of the WEIF holding what it knew would be illiquid assets,

in addition to those within the 10% limit. Link failed to sufficiently recognise the

risks of increased levels of illiquid assets being held and the increased risk of

liquidity issues arising. Link should have been fully aware of the risks and acted to

prevent the repeated use of this process which enabled a higher level of illiquid

funds to be held.

Link’s Early Awareness of and Response to Liquidity Problems (May 2017 - May

2018)

4.54. The WEIF was subject to sustained net asset outflow from May 2017 onwards. From

November 2017 onwards, there were discussions within Link expressing concerns

about the liquidity of the WEIF, as highlighted below:

(a)
On 20 November 2017, it was noted internally within Link that “we need

to now acknowledge that Woodford [i.e. WIM] is in need of better

management of its liquidity”.

(b)
On 21 November 2017, Link produced a liquidity analysis which showed

that the WEIF’s liquidity was deteriorating, the fund had reached a “tipping

point” and that there was a risk of the WEIF becoming “unbalanced”.

4.55. On 23 November 2017, WIM wrote to Link about the proposed Sabina listing

(dealt with in more detail in Section D below), which would result in certain

securities moving from the Unquoted Securities category, and thus no longer

counting towards the limit that Unquoted Securities must form no more than 10%

of NAV. It was noted internally at Link that the proposal “would indicate Woodford

[i.e. WIM] have no idea of the real problem and that this is at best a sideshow and

does nothing to improve liquidity. Do they realise that if this goes ahead they

cannot buy anymore”.

4.56. On 27 November 2017, after completion of a liquidity review the previous day

that considered the Initial Four Bucket Model, messages of concern about the

WEIF’s liquidity profile were circulated internally at Link, with one senior individual

noting that “[t]he overall liquidity of the portfolio continues to decline and we need

a firm plan on how to address”.

4.57. On 30 November 2017, a discussion was held between Link and WIM, for which

Link had produced a paper (sent to WIM on 28 November 2017) which set out

actions required of WIM “now” to explain: (i) how WIM would meet a redemption

of 5% or more in one day without “further compromising the liquidity profile of the

fund”; and (ii) the time it would take to bring the overall liquidity profile of the

WEIF into a more balanced position, such that the allocation to Liquidity Bucket 4

was reduced and the allocation to Liquidity Bucket 1 restored.

4.58. On 4 December 2017, WIM wrote to Link raising a number of matters in respect

of the recently issued IOSCO liquidity recommendations paper. WIM raised a

number of questions with Link concerning how Link, as the “responsible entity”,

was dealing with issues raised in the IOSCO guidance.

4.59. On 5 December 2017, Link circulated a paper, the context for which was described

in the background section as follows: “[i]n response to a number of concerns raised

with [WIM] by [Link] in respect of the liquidity structure of [the WEIF], WIM have

raised a number of matters in respect of the IOSCO paper”. The Link paper set out

its response to the questions raised by WIM. It referenced the discussion on 30

November 2017 and paper described in paragraph 4.57 above. Appendix A to the

paper noted that failure to ensure adequate liquidity within a fund at its extreme

could lead to a suspension and investors being unable to redeem their holdings,

which in periods of volatility could “cause capital erosion”. The next day, an

individual at Link noted concern about “the perilous state of the liquidity” in the

WEIF. The Authority has seen no evidence that the urgency of this concern was

conveyed to WIM.

4.60. On 11 December 2017, a series of internal Link emails recorded that (1) there

was serious concern about the WEIF’s liquidity, but (2) it was decided to wait for a

paper from WIM before considering what action to take. WIM submitted that paper

in early January 2018. However, the Authority has seen no evidence that Link took

any particular formal action in response to the submission of the paper.

4.61. On 18 January 2018, a Link liquidity analysis, presented at a committee meeting,

concluded that the circumstances “could suggest that the redemption flow has been

met by selling the more liquid assets and thereby increasing exposure to assets

which will be more difficult to sell in volume”, and noted that the position required

action to be taken. Nonetheless, the Authority has seen no evidence that Link

directed WIM to ensure that redemptions were met by selling assets from across

the liquidity buckets, even though that would help to ensure that the WEIF’s

liquidity profile was maintained. This “vertical-slicing” (in other words, sourcing

liquidity from across the portfolio, rather than solely from the more liquid buckets)

is recognised within the Authority’s guidance entitled “Liquidity Management for

30

investment firms: good practice”, published on 29 February 2016, as an example

of good practice in liquidity management.

4.62. Also in January 2018, the Initial Four Bucket Model was introduced (see

paragraphs 4.27 – 4.28 above), adopting a 100% Participation Rate and Full

Allocation Approach. Had Link adopted a Participation Rate of 20% and a Linear

Allocation Approach (which would have been reasonable and appropriate, as set

out at paragraph 4.117 below– unlike the assumptions actually adopted), the

Bucket 4 trigger that Link contemporaneously set would immediately have been

crossed, and would have remained so continuously until the WEIF was ultimately

suspended in June 2019.

4.63. On 1 February 2018, Link sent an email to WIM, pointing out that the level of

redemptions had risen recently and that a meeting would be helpful to discuss next

steps.

4.64. On 8 February 2018, a Link liquidity analysis reiterated the concern expressed at

the Link committee meeting on 18 January 2018. It noted a deterioration in the

overall liquidity profile of the WEIF over the period from January 2017 to January

2018. Reference was made to increased exposure to assets within Liquidity Buckets

3 and 4; a decrease in assets within Liquidity Buckets 1; and, “more significantly”,

a decrease in assets within Liquidity Bucket 2. It was noted that further discussion

with WIM would be required. This was discussed at a meeting involving Link and

WIM the next day, but the Authority has seen no record of any formal action plan

having been agreed at that stage.

4.65. On 15 February 2018, there was a meeting of a Link committee at which

reference was made to “the need to focus not only on the unquoted stock but also

on the overall liquidity position”. It was suggested that Link should fix an internal

benchmark against which the volume of unquoted holdings could be monitored, but

(save as set out below) the Authority has seen no evidence of this having been

communicated to WIM. It was recognised that realising assets to meet redemptions

would affect the shape of the WEIF for remaining investors; and that while the

majority of the assets within the WEIF could be sold quickly, there would be assets

that would take longer to sell. It was observed that the proportion of such assets

that would take longer to sell would increase incrementally as the more liquid assets

are sold.

4.66. In early May 2018, there were discussions between Link and WIM as to the

position to be taken in regulatory correspondence with the Authority. At WIM’s

suggestion, Link changed an original draft slide in order to remove references to a

limit of 35% on Buckets 3 and 4 which Link had proposed be implemented. Link

has stated that the reason for the change to the document was that, although Link

would monitor that limit internally, it had not imposed a specific limit on the WEIF’s

portfolio, nor had this been agreed with WIM. The subsequent references relayed

to the Authority were that these figures were “guidelines”.

The Monitoring Changes of May 2018

4.67. In response to contemporaneous questions from the Authority’s Supervisors, Link

stated that at or around the time of a Link committee meeting on 17 May 2018,

Link started to give serious internal consideration to whether it was necessary to

impose specific limits on WEIF’s liquidity profile.

4.68. On 30 May 2018, Link held a meeting to discuss the WEIF’s liquidity profile and

responses to be made to questions from the Authority. Link’s view of the meeting

was that it had been agreed that a limit of 35% of NAV on Bucket 4 and a limit of

70% on Buckets 3 and 4 combined would be imposed. However, Link and WIM

appear to have had different understandings of what had been agreed. In

particular, WIM believed that it had not agreed to hard limits, and that any breaches

would just lead to a discussion. In contrast, an individual within Link stated to the

Authority that even if the WEIF stayed within these limits, that did not mean that

its liquidity profile was acceptable. They thought that these particular thresholds

were set simply because they reflected the liquidity profile of the WEIF at the time,

and that the intention was simply to prevent further deterioration.

4.69. By July 2018, the WEIF’s liquidity had declined significantly. For example, from

this point on, the time it would have taken the WEIF to liquidate 5%, 10% and 20%

of its NAV significantly increased, and it consistently would have taken significantly

longer to liquidate 5% and 10% of its NAV than the bottom ranked comparator

fund. Furthermore:

(a)
Had Link adopted reasonable and appropriate assumptions, in particular

a Participation Rate of 25% and a Linear Allocation Approach, the Bucket

4 trigger would have been breached continuously from this point on.

(b)
Had a 20% Participation Rate been adopted, the trigger in respect of

Buckets 3 and 4, and the limit in respect of Bucket 4, would have been

breached continuously from this point on.

(c)
Whilst a range of Participation Rates might be used, and LFS has

indicated 30% might reasonably be used, we note that LFS did not use

that rate for any other metrics and variously used 20% and 25%

participation rates in other areas of monitoring. In the circumstances,

we consider that 25% was the appropriate and reasonable Participation

Rate to use for the liquidity bucket monitoring during the period being

considered.

4.70. On 16 July 2018, the liquidity of the WEIF was raised at a meeting involving Link

and WIM. WIM questioned Link about the rationale for the limits and sought clarity

from it about wording as to when the limits applied and what was required if the

WEIF approached these limits.

The Monitoring Changes of September 2018

4.71. In September 2018, WIM pressed for changes to be made to the liquidity

framework, having previously questioned the trading venues used for volume data.

Following discussions, Link accepted that such changes should be made.

4.72. WIM maintained throughout September 2018 that – contrary to Link’s view – it

(WIM) did not need to improve the liquidity in the WEIF. In particular:

(a)
On 11 September 2018, WIM approached Link with a proposal to

adjust the liquidity management framework.

(b)
On 20 September 2018, Link held a call with WIM. There was an

immediate dispute between Link and WIM as to whether it was agreed

on this call that the WEIF’s liquidity needed improving. Link’s position,

as set out in an email to WIM, was that there was a “need to improve

the overall liquidity profile of the fund” and for the “fund to be

rebalanced to a considerably more liquid profile”.

(c)
On 24 September 2018, Link accepted that it might be “useful” to

“consider” alternative calculations, but that the current monitoring

framework should remain in place for now, and that Link “continue[d]

to press the need for a long term rebalancing of the portfolio to a more

liquid overall profile as well as a reassessment and reformulation of an

effective liquidity monitoring framework”.

(d)
On 25 September 2018 (at the latest), Link changed position and

agreed to change the monitoring framework to the Revised Four Buckets

Model, as set out at paragraphs 4.33 – 4.38 above.

(e)
On 26 September 2018, Link recorded the change in an email and

stated that WIM and Link needed to “work together to formulate a

proposal for a more refined liquidity management framework” and

“acknowledge the need to rebalance the portfolio in the longer term (6m

+) to a more balanced liquidity profile appropriate for a daily dealing

UCITS fund”.

(f)
On 27 September 2018, WIM acknowledged the change in framework

and accepted that there were limits that could not be crossed. However,

WIM also stated that it did not “believe there is a need to rebalance the

[WEIF’s] profile to a more liquid one over the longer term”.

4.73. In reality, the liquidity of the WEIF had undergone a serious deterioration. For

example, applying Link’s own calculations under the Five Category Model, in

February 2018, 58% of the NAV was only liquidable in 8 or more days. This category

of securities was referred to by Link in its Five Category Model as the “illiquid

rump”;. However, by September 2018, this figure had increased to 100% of the

WEIF’s NAV (i.e. the entire fund classified as an “illiquid rump” under this model).

4.74. On 30 September 2018, Link produced a liquidity analysis of the WEIF. It pointed

out that “…bucket 4 was above the 35% threshold as at the end of September”.

The impact of the introduction of the Revised Four Bucket Model at this time meant

that the proportion of assets falling into Bucket 4 level went from a breach position

of 37.41% of NAV to 24.6%, thus enabling compliance with the limit.

Link’s Later Awareness of and Response to Liquidity Problems (October 2018 – June

4.75. Over the period from October 2018 to April 2019, the WEIF’s liquidity continued

to deteriorate. Applying Link’s own calculations under the Revised Four Bucket

(a)
Bucket 1 assets decreased from 14% to 8% of the NAV between

September 2018 and April 2019;

(b)
Bucket 2 assets increased from 26% of the NAV in September 2018 to

29% of the NAV in April 2019;

(c)
Bucket 3 assets decreased from 36% of the NAV in September 2018 to

32% in April 2019; and

(d)
Bucket 4 assets increased from 25% of the NAV in September 2018 to

33% in April 2019. As noted above, the starting position of 25% was

actually a revised lower level due to the new methodology being

introduced.

(a)
Had a 25% Participation Rate been used (even with a Linear Allocation

Approach), the Buckets 3 and 4 trigger would have been continuously

crossed (and limits would have been breached in November and-

December 2018 and between April and-May 2019); while the Bucket 4

limit would have been continuously breached.

(b)
Had a 20% Participation Rate been adopted, the Buckets 3 and 4 limits

would have been continuously breached.

4.77. On 1 October 2018, it was reported at a Link committee that a new contingency

plan had been received on 28 September 2018 from WIM regarding the WEIF’s

“35% liquidity limit” and that “Woodford [i.e. WIM] had now acknowledged that

they had a liquidity issue with the Fund”. It was noted that a meeting had been

arranged for 2 October 2018 with WIM to discuss the matter in more detail. At that

meeting Link “confirmed that [Link] do not foresee any liquidity issues on the

current redemption numbers and will look to meet [the Authority] with WIM once

the metrics are concluded”.

4.78. On 18 October 2018, it was reported to a Link committee that “the new

methodology [i.e. the Revised Four Bucket Model] suggested that the fund has

more liquidity than previous analysis had shown… previously figures were too

conservative”. This assertion (that previous analyses of liquidity were too

conservative) was incorrect, as Link would have realised had it adopted appropriate

assumptions as set out at paragraph 4.116 when applying the Revised Four Bucket

Model.

4.79. On 30 November 2018, Link conducted its monthly liquidity analysis, finding that

the WEIF’s liquidity had continued to deteriorate.

4.80. On 10 December 2018, a meeting was held between Link and WIM. Link produced

a summary of that meeting for WIM on 12 December 2018, including recording

its expectation that WIM would “be undertaking prompt action to address both the

valuation and liquidity concerns with the ultimate goal of bringing the hard to value

assets down from 19% to less than 10% and for the portfolio to return to a more

balanced position between the four liquidity buckets”. However, no deadlines were

set for this to happen. WIM replied with a holding email, stating that it would

“respond more fully shortly”. The Authority has seen no evidence that any

immediate formal action was taken in response to this expectation.

4.81. On 17 December 2018, it was noted internally at Link that WIM were “still too

relaxed about things…Short term actions are risible and longer term actions are still

too leisurely”. The Authority has seen no evidence of any action by Link arising

from this concern.

4.82. The Link liquidity analysis of the WEIF dated 31 December 2018 noted that “the

overall trend of deteriorating liquidity has continued, with buckets 1-3 decreasing

as a % of NAV while bucket 4 increased by 48bps”.

4.83. On 21 January 2019, it was noted in response to a document that set out the

contingency plans for dealing with the level of Unquoted Securities which had been

sent by WIM to Link that “parts of the document reflect an overly positive

perspective…but that it [sic] not of any consequence at the moment”.

36

4.84. Liquidity concerns continued to be expressed by Link, including at a Link committee

meeting on 24 January 2019; and at a meeting involving WIM on 25 February

2019.

4.85. On 28 March 2019, Link wrote to WIM, making it clear that, having read the latest

liquidity contingency plan, it was not satisfied with WIM’s proposed actions to

improve the WEIF’s liquidity. It required WIM to identify “concrete actions that have

been or will be taken to improve the combined buckets 3 and 4 metric, particularly

if the 70% limit is breached”, and noted that Link “continues strongly to urge WIM

to bring the liquidity profile out of the trigger by month end”. WIM responded the

next day, resisting the need to restore the WEIF’s position to below the amber

trigger threshold, and arguing that the buckets did not reflect the WEIF’s true

liquidity. WIM also noted that such a request was not in accordance with the limit

framework plan that Link had approved, namely that, when an amber threshold

was crossed, WIM should prepare contingency plans which would then be enacted

if the red threshold was crossed.

4.86. It was recognised internally within Link that WIM’s response was not adequate to

the scale of the problem, with views being raised within Link that action to take

WIM out of the trigger needed to be taken by the end of the week. The Authority

has seen no evidence that this urgency was passed on to WIM: instead, on 4 April

2019, Link told WIM only that the WEIF should be brought out of the trigger “as

soon as practicable”, and that the Buckets 3 and 4 metric was “concerning”.

4.87. On 26 April 2019, Link identified a breach of the Buckets 3 and 4 limit, with Link

measuring the metric as 70.01% of NAV, compared to the 70% limit. Link noted,

in correspondence with WIM, that WIM had notified them of the upcoming expected

breach of the limit and was already taking action to bring the metric back below

the limit. Given the steps outlined by WIM, Link told WIM that they did not see a

need for further action in relation to the breach.

4.88. On 22 May 2019, Link told WIM on a call that they were very concerned about the

level of fair value assets and the WEIF’s liquidity profile. The next day, it was noted

internally that “reality is beginning to dawn on Woodford [i.e. WIM] and they are

at last looking to sell less liquid stocks”.

4.89. However, by this point, as recalculated using the reasonable and appropriate

parameters of a 25% Participation Rate and the Linear Allocation Approach:

(a)
the proportion of the WEIF’s holdings that were classified as Bucket 1

decreased from a high point of 27% in September 2017 to a low point

of 8% in May 2019;

(b)
the proportion of the WEIF’s holdings that were classified as Buckets 3

and 4 increased from a low point of 50% in May 2017 to a high point of

74% in May 2019; and

(c)
the proportion of the WEIF’s holdings that were classified as Bucket 4

increased from a low point of 23% in May 2017 to a high point of 41%

in May 2019.

4.90. If a Participation Rate of 20% is adopted, the position was as follows:

(a)
the proportion of the WEIF’s holdings that were classified as Bucket 1

decreased from a high point of 23% in September 2017 to a low point

of 7% in May 2019; and

(b)
the proportion of the WEIF’s holdings that were classified as Buckets 3

and 4 increased from a low point of 53% in September 2017 to a high

point of 77% in May 2019.

(c)
the proportion of the WEIF’s holdings that were classified as Bucket 4

increased from a low point of 25% in May 2017 to a high point of 45%

in December 2018.

4.91. Further, each of the T+ Metrics had followed a clearly declining trend from January

2018 (at the latest) to the end of the Relevant Period, with the proportion of the

WEIF’s securities that were liquidable, based on assessments conducted, within:

(a)
1 day decreasing from 5% in May 2017, to 2% in September 2018 to

1% in May 2019;

(b)
5 days decreasing from 20% in September 2017, to 11% in September

2018 to 6% in May 2019; and

38

(c)
20 days decreasing from 45% in September 2017, to 31% in September

2018 to 23% in May 2019.

4.92. Yet further, by May 2019, based on assessments conducted, WEIF would have

taken:

(a)
5 days to liquidate 5% of its NAV (compared with 2 days in May 2017);

(b)
9 days to liquidate 10% of its NAV (compared with 3 days in May 2017);

and

(c)
17 days to liquidate 20% of its NAV (compared with 6 days in May

2017).

4.93. On 31 May 2019, KCC informed WIM it would be redeeming in full its holding in

the WEIF. In the days following this request, Link liaised with WIM concerning

options to meet the redemption which was valued at £237 million (6.5% of NAV)

at that time. After considering a number of options, on 3 June 2019, Link

concluded that immediate suspension was the appropriate response in order to

protect the interests of investors in the WEIF.

SECTION
D:
UNQUOTED
SECURITIES
AND
LISITNGS
ON
THE

INTERNATIONAL STOCK EXCHANGE

WEIF’s investments in Unquoted Securities

4.94. The WEIF invested in a number of Unquoted Securities whose shares were not listed

and traded on an exchange.

4.95. Between October 2014 and October 2015, WEIF invested in Benevolent, Industrial

Heat, Ombu and Sabina (“the TISE companies” or “the TISE securities”), which

were all, when the investments were first made, Unquoted Securities:

Initial investment Date

4.96. As a part of WIM’s investment into the TISE companies, WIM made commitments

to provide further funding to the TISE companies via future share subscriptions.

4.97. In August 2017, WIM entered a moratorium on any further investments in Unquoted

Securities, as the WEIF was approaching the 10% limit. By the end of November

2017, the percentage of Unquoted Securities held by WEIF stood at 9.82%.

4.98. Unknown to Link, WIM notified each of the TISE companies in the first instance

about the issues arising from the funding moratorium as well as the WEIF nearing

the 10% limit. WIM was unable to provide further funding to the TISE companies

unless the securities held by the WEIF became listed, meaning that they would no

longer be covered by the 10% limit. Subsequently, each of these 4 companies

listed shares in their companies on TISE, the listings occurring as set out below:

Company
Date of listing
Stock exchange

Sabina
28 December 2017
TISE

Ombu
15 June 2018
TISE

Industrial Heat
5 October 2018
TISE

Benevolent
21 March 2019
TISE

4.99. Notwithstanding their listing, prior to the suspension of the WEIF on 3 June 2019,

there were no arm’s length market dealings in any of the TISE securities, and only

one trade recorded for any of the TISE securities, that being a trade involving

Sabina shares with the WEIF acquiring shares from the Woodford Patient Capital

Trust (another fund managed by WIM).

4.100. Link was of the view that the TISE listings had no effect on the WEIF’s overall

liquidity profile, as they would remain categorised as Bucket 4 securities even after

listing. Link was also aware, prior to the relevant listings, that the TISE securities

were likely to be, at most, thinly traded, if traded at all. Other than Ombu, the

only shares listed were those held by the WEIF. In these circumstances, the listing

of these securities did nothing to improve the liquidity profile of the WEIF. This was

recognised by Link. It was also recognised by Link that whilst, in the short term,

the TISE listings had no effect on the liquidity profile of the WEIF, on a longer-term

basis the TISE listings enabled WIM to: (a) reduce pressure on the 10% Unquoted

Securities limit; (b) increase the size of the securities which were either unquoted

or otherwise subject to FVP; and (c) hold further securities which, in terms of

liquidity, had the same characteristics as the Unquoted Securities.

4.101. Although ACDs are not usually expected to be involved in an underlying asset's

corporate actions, including listing on exchange, Link failed to give consideration to

the potential implications for the WEIF’s liquidity profile, as outlined above, where

businesses which the WEIF had holdings in announced an intention to convert from

unlisted status to becoming listed on an exchange.

4.102. The WEIF also held shares in a further Unquoted Security, Proton Partners (that

subsequently became Rutherford Health), initially purchased in January 2015.

Subsequent to this, Proton Partners issued shares to the WEIF which were listed on

the NEX exchange in February 2019. The issue of shares, and the subsequent

listing, meant that the shares were removed from WEIF’s Unquoted Securities total.

Although listed, there was no market for pricing purposes, and only one trade was

ever made. Proton Partners continued to be valued by Link using FVP after it was

listed on NEX.

4.103. As well as enabling the WEIF to continue to hold the Unquoted Securities noted

above, the listings also enabled the further investment of the WEIF’s funds into

them. The proportion of the WEIF’s portfolio that comprised securities that were

valued using FVP (including all but 2 of the Unquoted Securities) increased

significantly from 8.8% in May 2017 to 21.5% in May 2019. This added to the

deterioration to WEIF’s overall liquidity.

SECTION E: THE AUTHORITY’S ANALYSIS OF THE WEIF’S LIQUIDITY

DURING THE RELEVANT PERIOD

4.104. The Authority has assessed the WEIF’s liquidity over the Relevant Period by

reference to a statistical model based on the historical trading data for the securities

in which the WEIF and peer funds invested (the “Statistical Model”). The Statistical

Model uses data relating to the monthly composition of the funds, as well as data

on the investments each fund held (the number of shares, their value, and their

average daily trading volume), in order to ascertain:

(a)
relevant liquidity metrics for the WEIF and the comparator funds;

(b)
the effect of stressed scenarios on the WEIF; and,

(c)
the time it would take to liquidate various percentages of the portfolios

held by the WEIF and comparator funds.

4.105. In summary, the Statistical Model shows:

(a)
Link’s contemporary liquidity calculations were flawed. In particular,

they inappropriately assumed a Participation Rate of 100%.

(b)
Liquidity in the WEIF was deteriorating by reference to the

contemporary metrics of which Link was aware:

a.
Even on the results of Link’s contemporary calculations, it was clear

that liquidity in the WEIF was deteriorating.

b.
Had Link adopted appropriate assumptions in calculating those

liquidity metrics, it would have identified that the liquidity profile of

the WEIF deteriorated significantly during the Relevant Period.

c.
This deterioration in liquidity came about because redemptions

tended to be met by liquidating the more liquid assets first (rather

than because of a disproportionate increase in the value of the more

illiquid securities).

4.106. There were further indicators which Link did not contemporaneously monitor (in

particular: the time it would have taken to liquidate certain proportions of the NAV;

the Amivest metric after September 2018; and WIM’s calculation of the Initial T+20

Metric after September 2018), which establish that the liquidity of the WEIF was

deteriorating. Had Link been in any doubt as to the deteriorating liquidity position

(which it should not have been), these indicators would have confirmed the position

beyond doubt.

4.107. The proportion of the WEIF invested in Unquoted Securities was generally within

the 9.5% limit set by Link. While the proportion of the WEIF’s portfolio that

comprised Unquoted Securities remained broadly stable during the Relevant Period,

that calculation excluded securities which were quoted but which were subject to

FVP, and so did not capture the true amount of the WEIF assets which were not

readily tradeable. The WEIF’s securities which were subject to FVP were a driving

factor in the deterioration of the WEIF’s liquidity, and the proportion of the WEIF’s

portfolio that comprised such securities increased during the Relevant Period.

4.108. The stress-testing conducted by Link was inadequate. Had adequate stress-testing

been conducted, it would have become apparent that the WEIF was not able to

withstand certain stressed but plausible scenarios. In particular, Link’s stress

testing failed to test for the possibility of KCC redeeming alongside other

redemptions at the largest retail redemption rate over the preceding 5-day period.

Had that stress-testing (or stress-testing using similar appropriate parameters)

been conducted, it would have shown that, from 1 September 2018, the WEIF

would have been unable to meet its required redemptions in such plausible

circumstances.

4.109. The WEIF was an outlier in terms of its liquidity, and among the least liquid of

comparable funds, and on a number of metrics, the least liquid.

4.110. Each of these six findings is addressed in more detail immediately below.

Inappropriate Assumptions and data issues

4.111. The metrics used to measure the liquidity of the WEIF during the Relevant Period

were not reasonable and relied upon inappropriate assumptions:

(a)
First, as to the assumption of a 100% Participation Rate:

a.
That assumption was not realistic, because it assumed that a

single entity could access the entire liquidity in respect of a

particular security without significantly impacting the price of

that security.

b.
Link suggested that the use of the unrealistic 100% Participation

Rate was offset by the use of another unrealistic (but supposedly

overly-prudent) measure – a Full Allocation Approach. The

Statistical Model shows that these two partly offsetting

assumptions resulted in a model that failed to reflect the liquidity

of the underlying assets; and in the liquidity profile of the WEIF

generally appeared better than it would have done without

employing those assumptions.

(b)
Secondly, as to the ADTV for the Four Bucket Model:

a.
It was not appropriate to fix the ADTV at the traded volume in

March 2017 (in respect of the Pre-September 2018 Period). This

would have provided an increasingly outdated view on liquidity.

(c)
Thirdly, Link used an incorrect data source for its liquidity calculations.

The data relied on was based on the “ALL_BROKERS_ADV_TOT_AGGR

_VOL” Bloomberg field, which reflects the total volume of shares

advertised by all brokers for one specific exchange, and not the total

volume of shares traded across all exchanges a security is quoted on,

which is one of the assumptions underpinning metrics used to monitor

liquidity i.e. that the ADTV was sourced from all exchanges.

(d)
Fourthly, in relation to the Amivest Score, Link did not limit the

assumptions to the amount of a security that could be sold.

Deterioration of the WEIF’s Liquidity during the Relevant Period

4.112. This
section
sets
out
the
WEIF’s
liquidity
position
as
assessed
both

contemporaneously, and by reference to the Statistical Model. In respect of each

metric, either (1) the contemporaneous calculation showed liquidity to be

deteriorating, and once the inappropriate assumptions are corrected, that

deterioration is shown to have been even worse; or (2) the contemporaneous

calculation did not show liquidity to be deteriorating, but once the inappropriate

assumptions are corrected, that is shown to have been false.

The Liquidity Buckets

As Calculated by Link

4.113. Based on the metrics set out in the Link liquidity reports, Link’s own calculations

demonstrated that the liquidity of the WEIF deteriorated significantly:

(a)
Applying the Five Category Model:

a.
In February 2018, the assets liquidable in: (i) one day

represented 2% of the WEIF’s NAV; (ii) between two and seven

days represented 38% of the WEIF’s NAV; and (iii) eight days or

more(referred to by Link as the “illiquid rump”) represented 58%

of the WEIF’s NAV.

b.
In September 2018, 100% of the WEIF’s NAV would take eight

days or more to liquidate (i.e. under this model the entire fund

classified as an “illiquid rump”).

(b)
Applying the Revised Four Bucket Model:

a.
Bucket 1 assets decreased from 14% to 8% of the WEIF’s NAV

between September 2018 and April 2019;

b.
Bucket 2 assets remained broadly consistent throughout the

period, ranging from 24% to 29% of the WEIF’s NAV;

c.
Bucket 3 assets decreased from 36% of the WEIF’s NAV in

September 2018 to 32% in April 2019; and

d.
Bucket 4 assets increased from 25% of the WEIF’s NAV in

September 2018 to 33% in April 2019.

4.114. This led to breaches of applicable triggers and limits (as contemporaneously

calculated by Link), as follows:

(a)
In September 2018, the WEIF breached the 35% limit for Bucket 4;

(b)
In December 2018, the WEIF breached the 65% trigger for Buckets 3 and 4

combined;

(c)
In March 2019, the WEIF breached the 65% trigger for Buckets 3 and 4

combined; and

(d)
In April 2019, the WEIF breached the 70% limit for Buckets 3 and 4

combined.

The Four Bucket Model as re-calculated using the Statistical Model

4.115. If the Four Bucket Model is applied using appropriate assumptions, the WEIF’s

liquidity deterioration is even more acute.

4.116. First, using a 25% Participation Rate and the Linear Allocation Approach:

a)
During the Relevant Period:

a.
the proportion of the WEIF’s holdings that were classified as

Bucket 1 decreased from a high point of 27% in September 2017

to a low point of 8% in May 2019;

b.
the proportion of the WEIF’s holdings that were classified as

Buckets 3 and 4 increased from a low point of 50% in May 2017

to a high point of 74% in May 2019; and

c.
the proportion of the WEIF’s holdings that were classified as

Bucket 4 increased from a low point of 23% in May 2017 to a

high point of 41% in May 2019.

(b)
Further, the thresholds set by Link in respect of the Liquidity Buckets

were breached:

a.
In respect of Buckets 3 and 4, the trigger was continuously

breached from October 2018; and the limit in November and

December 2018, and April and May 2019.

b.
In respect of Bucket 4, the trigger was continuously breached

from July 2018, and the limit from October 2018.

(c)
These points are illustrated in the diagram set out below:

4.117. Second, using a 20% Participation Rate and the Linear Allocation Approach:

(a)
During the Relevant Period:

a.
the proportion of the WEIF’s holdings that were classified as

Bucket 1 decreased from a high point of 23% in September 2017

to a low point of 7% in May 2019;

b.
the proportion of the WEIF’s holdings that were classified as

Buckets 3 and 4 increased from a low point of 53% in September

2017 to a high point of 77% in May 2019; and

c.
the proportion of the WEIF’s holdings that were classified as

Bucket 4 increased from a low point of 25% in May 2017 to a

high point of 45% in December 2018.

(b)
Further, the thresholds set by Link in respect of the Liquidity Buckets

were breached:

a.
In respect of Buckets 3 and 4, the trigger was continuously

breached from July 2018, and the limit was breached in August

2018 and then continuously from October 2018; and

b.
In respect of Bucket 4, the trigger was breached in August,

September and October 2017, and then continuously from

January 2018; while the limit was breached in April 2018 and

then continuously from July 2018.

(c)
These points are illustrated in the diagram set out below:

Chart 5

4.118. The deterioration of the liquidity of the WEIF was primarily due to the lack of

“vertical slicing” over time; however, instead the WEIF disproportionately liquidated

the most liquid assets first (from Buckets 1 and 2) while retaining more illiquid

assets (from Buckets 3 and 4).

The T+ Metrics

4.119. The T+1, T+5 and T+20 Metrics as analysed by Link remained broadly consistent

throughout the Relevant Period.

4.120. Analysed through the Statistical Model, the true position was that each of the T+

Metrics assessed by Link clearly followed a declining trend from January 2018 (at

the latest) to the end of the Relevant Period, with the proportion of the WEIF’s

securities that were liquidable, under the model used, within:

(a)
1 day decreasing from 5% in May 2017, to 2% in September 2018, to

1% in May 2019;

(b)
5 days decreasing from 20% in September 2017, to 11% in September

2018, to 6% in May 2019; and

(c)
20 days decreasing from 45% in September 2017, to 31% in September

2018, to 23% in May 2019.

4.121. Moreover, WIM’s calculation of the Initial T+20 metric (which used a 20%

Participation Rate) showed a deterioration from around September 2017, and would

have shown a continuous breach of the trigger and persistent breaches of the limit

applicable prior to September 2018 from August 2018 and September 2018

respectively, had those thresholds been maintained.

The Redemption Metrics

4.122. As calculated by Link up until August 2018, the Amivest Score did not breach the

then-applicable limit of 30bps. After August 2018, Link did not calculate the

Amivest Score.

4.123. However, the Amivest Score as calculated by Link did not adequately reflect

changes in the liquidity profile of the WEIF. In particular, this was because Link did

not limit their assumptions to the amount of a security which could be sold.

Recalculated to correct for that inappropriate assumption, the limit of 30bps would

have been breached in 13 months across the whole of the Relevant Period.

The RCR

4.124. The RCR of the WEIF broadly declined over the Relevant Period and first breached:

(a)
the limit (and accordingly the trigger) in May 2019 for the 1-day and 5-

day RCR; and

(b)
the limit (and accordingly the trigger) in March 2019 for the 20-day

RCR.

4.125. Accordingly, each of the metrics monitored by Link contemporaneously either

showed a deterioration in liquidity, or would have done so (or would have done so

more accurately), had it been calculated appropriately.

4.126. In particular, if Link had used a Participation Rate of 25% and Linear Allocation, the

WEIF would have breached thresholds in respect of the Liquidity Buckets in April

and May 2018, and continuously from July 2018.

Other Indications of Deteriorating Liquidity

Time to Liquidate

4.127. Had Link considered the time which it would have taken to liquidate various portions

of the WEIF (which would have been appropriate, given the level of redemption),

it would have identified that, during the Relevant Period, the time it would have

taken to liquidate portions of the portfolio (either 5%, 10% or 20%) increased

significantly from August 2018. In particular, the WEIF would have taken:

(a)
2 days to liquidate 5% of its NAV between May 2017 and July 2018.

This increased to 5 days by May 2019.

(b)
3 days to liquidate 10% of its NAV in May 2017. This increased to 9

days by May 2019.

(c)
6 days to liquidate 20% of its NAV in May 2017. This increased to 18

days by May 2019.

The Amivest Redemption Metric

4.128. Had the Amivest metric continued to apply post-September 2018, the threshold of

30bps would have been breached in 13 months of the Relevant Period (as set out

at paragraph 4.123 above).

WIM’s Calculation of the T+20 Metric

4.129. Had the thresholds applicable to WIM’s calculation of the Initial T+20 Metric been

maintained throughout the Relevant Period, there would have been a continuous

breach of the trigger and persistent breaches of the limit from August 2018 and

September 2018 respectively on WIM’s own contemporaneous calculations (as set

out at paragraph 4.121 above).

4.130. The portfolio data for the WEIF provided by Link shows the proportion of the NAV

that was invested in Unquoted Securities decreased between September 2017 and

(a)
The percentage of Unquoted Securities in the WEIF was more than 8.5%

of the NAV (the initial Link limit) for almost the entirety of the Relevant

Period, except for March to August 2018.

(b)
The percentage of Unquoted Securities in the WEIF also breached Link’s

second internal limit (of 9.5%) in August to November 2017, January to

February 2018, September 2018 and June 2019.

4.131. The proportion of the WEIF’s portfolio that comprised Unquoted Securities did in

fact remain broadly stable during the Relevant Period, with the WEIF breaching the

initial Link limit of 8.5% at month-end in 20 of 26 months during the Relevant

Period, and breaching the second limit of 9.5% at month-end in 8 of 26 months.

4.132. In addition to the breaches of Link’s internal limits for Unquoted Securities, the

WEIF also breached the regulatory limit of 10% on three occasions during the

Relevant Period. The three occasions were 21 November 2017, 2 February 2018

and 6 March 2018.

4.133. However, securities which were quoted but which were subject to FVP were

excluded from the calculation of Unquoted Securities, and so the calculation did not

capture the true amount of the WEIF’s assets which were not readily tradeable. In

this respect:

(a)
The percentage of securities that were quoted but were subject to FVP

increased significantly between May 2017 (when they represented 0.2%

of the NAV) and May 2019 (when they represented 12.4% of the NAV).

(b)
When the quoted securities and Unquoted Securities that were subject

to FVP are combined, they increased significantly in the Relevant Period

from 8.8% in May 2017 to 21.5% in May 2019. This appears to have

been a driving factor in the deterioration of the WEIF’s liquidity.

(c)
From December 2017, the quantity of securities classified both as

unquoted, and quoted but subject to FVP, continuously exceeded 10%

of the NAV.

4.134. The impact of the significant increase in securities subject to FVP is illustrated in

the chart below (the 10% breaches noted in paragraph 4.132 above are intra month

so do not appear on the chart):

Chart 6

4.135. The stress-testing conducted by Link was inadequate. Had adequate stress-testing

been conducted, it would have become apparent that the WEIF was not able to

withstand certain stressed but plausible scenarios.

ADTV Stresses

4.136. The stressed scenarios used by Link for stress-testing were not statistically

representative of stressed but plausible scenarios for the ADTV of the securities in

which the WEIF had invested.

4.137. Link performed stress testing by stressing the ADTV of securities held by the WEIF

by 20% for Large Cap securities and 40% for Mid Cap and Small Cap securities.

However, this approach did not encompass the stresses to which the WEIF might

plausibly have been exposed. In fact, on proper analysis:

(a)
For the Large Cap securities, the chance of a 20% decrease in the ADTV

was between one in seven and one in five.

(b)
For the Mid Cap securities, the chance of a 40% decrease in the ADTV

was between one in 20 and one in 10.

(c)
For the Small Cap securities, the chance of a 40% decrease in the ADTV

was between one in five and one in four.

4.138. None of these represent sufficiently unlikely scenarios to provide an appropriate

proxy of “stressed but plausible” scenarios for the ADTV of the securities held by

the WEIF.

4.139. After September 2018, Link performed stress testing on the RCR by modelling the

impact of redemptions of 10%, 15% and 20% of the portfolio. However, this stress

testing failed to test for the possibility of KCC redeeming alongside other

redemptions at the largest retail redemption rate over the preceding 5-day period.

Had such a stress-test (or stress-testing using similar appropriate parameters)

been performed, based on assessments conducted, it would have shown that, from

September 2018, the WEIF would have been unable to meet redemptions in these

circumstances.

Combined Stresses on ADTV and Redemption Rate

4.140. Had the stress-testing been conducted for the plausible eventuality of combined

stress on ADTV and the largest retail redemption rate over the preceding 5-day

period, it would have revealed that the trigger set by Link in respect of the 5-day

RCR was breached throughout the Relevant Period under all of the scenarios

analysed.

Comparison with Other Funds

4.141. The WEIF was significantly less liquid than comparator funds. As set out below, on

a number of metrics, it was the least liquid fund when compared against 225

comparable funds.

4.142. First, applying the Four Bucket Model using the Statistical Model to the comparator

funds:

(a)
Bucket 1: From July 2018 to the end of the Relevant Period, the

proportion of the WEIF’s securities that were allocated to Bucket 1 (and

therefore liquidable within 7 days) deteriorated from 18% to 8%, which

was significantly lower than the bottom ranked fund.

(b)
Buckets 1 and 2: From October 2017 onwards, the proportion of the

WEIF’s securities that were allocated to Buckets 1 and 2 (and therefore

liquidable within 30 days) were amongst the least liquid 5% of the

comparable funds.

(c)
Buckets 1, 2 and 3: From January 2018 onwards, the proportion of the

WEIF’s securities that were allocated to Buckets 1, 2 and 3 (and

therefore liquidable within 180 days) were amongst the least liquid 5%

of the comparable funds.

4.143. Second, applying the T+ Metrics to comparator funds:

(a)
T+5 Metric: From July 2018 for the remainder of the Relevant Period,

the proportion of the WEIF’s securities that were liquidable in 5 days

deteriorated from 12% to 6%, which was significantly lower than the

bottom ranked comparable fund.

(b)
T+10 Metric: From July 2018 for the remainder of the Relevant Period,

the proportion of the WEIF’s securities that were liquidable in 10 days

deteriorated from 22% to 12%, which was significantly lower than the

bottom ranked comparable fund.

(c)
T+20 Metric: From October 2018 for the remainder of the Relevant

Period, the proportion of the WEIF’s securities that were liquidable in 20

days deteriorated from 25% to 22%, which meant that the WEIF was

amongst the least liquid 5% of the comparable funds.

4.144. Third, the WEIF was also significantly less liquid than most comparator funds when

assessed by reference to how long it would take to liquidate various percentages

of the NAV of the WEIF:

(a)
The WEIF would have taken significantly longer to liquidate 5% of its

NAV than comparable funds, with the position worsening from August

2018. For example, 95% of the comparable funds could liquidate 5%

of their NAV within 1 day, whereas the WEIF took between 2 and 5 days

to liquidate 5% of its NAV.

(b)
The WEIF would have taken longer to liquidate 10% of its NAV than

comparable funds, with the position worsening significantly from July

2018. For example, 95% of the comparable funds could liquidate at

least 10% of their NAV within between 1 and 2 days, whereas the WEIF

took between 3 and 9 days to liquidate 10% of its NAV.

(c)
The WEIF would have taken longer to liquidate 20% of its NAV than

comparable funds (being in the bottom 1% of such funds), with the

position worsening significantly from July 2018.

(d)
Accordingly:

a.
The time it would have taken to liquidate the WEIF’s NAV was

significantly longer than would have been the case for the

comparable funds. At least 50% of those funds could liquidate

up to 20% of their NAVs within 1 day, compared with between 5

and 18 days for the WEIF; and

b.
From July 2018, the time it would have taken the WEIF to

liquidate 5%, 10% and 20% of its NAV significantly increased

and it consistently would have taken the WEIF significantly

longer to liquidate 5% and 10% of its NAV than the bottom

ranked comparator fund.

4.145. Fourth, during the Relevant Period, the WEIF experienced the worst performance

of the least liquid comparator funds until September 2018, when its performance

was in line with just one other fund. For that reason, compared to its peers, the

WEIF had a heightened liquidity risk throughout the Relevant Period.

Impact on ability of investors to redeem

4.146. In the circumstances, the Authority considers that the WEIF’s liquidity profile

deteriorated significantly during the Relevant Period and that Link’s failings (as

particularised in the Failings section immediately below): (a) materially contributed

to the risk that suspension would be required; and (b) placed those investors who

did not redeem prior to the point of suspension at a disadvantage.

4.147. The ‘first mover advantage’ for those redeeming earlier was exacerbated by the

failure of Link to adequately monitor how redemptions were being met by WIM and

to help prevent further deterioration of liquidity. More liquid assets were sold to

meet redemptions exacerbating the decline in liquidity. Link could have done this

in a number of ways including requiring assets to be sold down equally across the

liquidity profile, referred to as vertical slicing. This would have prevented a

disproportionate sale of the most liquid assets. Had vertical slicing been required

by Link, the WEIF’s liquidity would not have deteriorated in the manner in which it

did.

4.148. Suspension was not something Link had adequately considered. This resulted in

urgent consideration being given to options following the KCC redemption. Had

suspension occurred earlier, it would have been likely to provide better outcomes

for investors than the outcomes resulting from the suspension which occurred.

Link’s failure to proactively consider and plan for the possibility of suspension was

a significant failing on its part.

4.149. In a similar way to failure to consider suspension, the failure by Link to understand

the significance of the liquidity problems meant that it also failed to proactively and

appropriately manage what information should be provided to unitholders and

putative investors about the increased risks caused by holding large levels of illiquid

assets. Whilst Link should have been running the fund in a way which avoided the

risks which arose, the fact that it failed to appreciate the scale of risk meant that it

missed opportunities to appropriately update investors and the Authority’s

supervisors in any informed way about the increased risks.

5.
FAILINGS

5.1.
The statutory and regulatory provisions relevant to this Notice are referred to in

Annex A.

5.2.
By reason of the facts and matters set out above, during the period from 31 July

2018 to 3 June 2019, Link breached:

(a)
Principle 2 (skill, care and diligence);

(b)
Principle 6 (fair treatment of customers);

Failings in respect of the WEIF’s liquidity profile

5.3.
By 31 July 2018, the WEIF’s liquidity profile was unreasonable and inappropriate in

light of the redemption policy in the fund prospectus. In particular, as set out in

section E above:

(a)
Had Link adopted, as it should have done, an appropriate Participation

Rate (even assuming it also altered the allocation method) for its

Liquidity Bucket Metric, the thresholds which it had set for that metric

would have been breached from July 2018 (if Link had used the 25%

Participation Rate and linear allocation method it used for the T+ and

Redemption Metrics) and from January 2018 (if Link had used the 20%

Participation Rate and linear allocation method).

(b)
There were other indications which Link contemporaneously monitored

and of which Link was aware throughout the Relevant Period which

clearly indicated that the liquidity of the WEIF was deteriorating and

imprudent.

(c)
There were further indications which Link did not contemporaneously

monitor that establish that the liquidity of the WEIF was deteriorating

and imprudent. Had Link been in any doubt as to the deteriorating and

inappropriate liquidity position (which it should not have been), it should

have conducted further investigations which would have identified these

indications and confirmed the position beyond doubt. This deterioration

in liquidity (and the consequent breaches) came about in part because

redemptions tended to be met by liquidating the more liquid assets first

(rather than because of a disproportionate increase in the value of the

more illiquid securities).

(d)
The stress-testing conducted by Link was inadequate. Had adequate

stress-testing been conducted, it would have become apparent that the

WEIF was not able to withstand stressed but plausible scenarios. In

particular, Link’s stress testing failed to test for the possibility of KCC

redeeming alongside other redemptions at the largest retail redemption

rate over the preceding 5-day period. Had that stress-testing (or stress-

testing using similar appropriate parameters) been conducted, it would

have shown that from 1 September 2018, the WEIF would have been

unable
to
meet
its
required
redemptions
in
such
plausible

circumstances.

(e)
The WEIF was an outlier and among the least liquid of comparable

a.
the proportion of the WEIF’s securities that were easily liquidable

(i.e. within 7 days) was significantly lower than that of

comparable funds throughout the Relevant Period; and

b.
from August 2018, and for the remainder of the Relevant Period,

the WEIF’s liquidity was lower than the bottom ranked

comparable fund in a number of respects.

(f)
In all the circumstances, based on the indications that Link

contemporaneously monitored and the stress testing that it in fact

carried out, together with the implications of sustained and significant

diminution of NAV over an extended period of time, Link should have

appreciated that there were compelling signs that liquidity was a

significant issue in the context of the WEIF’s redemption requirements

and that urgent and significant action should have been taken to reduce

risks to remaining unitholders.

5.4.
In these circumstances, those investors who redeemed between November 2018

and 3 June 2019 were treated more favourably than the remaining investors. Given

the continued trend of redemptions (outflows) exceeding subscriptions (inflows)

and no obvious reason for this to change, it was apparent that redemptions would

continue to be met by the sale of the more liquid assets, which had been the pattern

over the previous 18 months. Urgent steps to rebalance the portfolio should have

been taken to ensure fairness to all investors, not just those seeking to redeem.

5.5.
LFS failed to appreciate the urgency of the situation or to consider the possibility

of suspension, with the KCC redemption request appearing to be the first and only

point at which it had become aware that suspension might be needed. This was

despite the fact that once the WEIF’s liquidity profile had deteriorated to an

unreasonable extent Link should have been considering the full range of options to

protect investors.

5.6.
The prospectus for the WEIF included various provisions which could be used to

manage liquidity, including use of notice periods and suspension. Whilst suspension

because of poor liquidity management should never normally need to occur, at no

stage prior to the KCC redemption did Link sufficiently consider taking this step to

protect the remaining unitholders. This exposed remaining unitholders to

detriment caused by first mover advantage when others redeemed their holdings.

The fact that the need to suspend was not sufficiently considered by Link before

the KCC redemption increased the harm to remaining investors. Given the

precarious state of the WEIF’s liquidity over an extended period of time, Link should

have at least considered whether suspension was required at an earlier date in

order to protect unitholders from harm. Link’s failure to proactively consider and

plan for the possibility of suspension was a significant failing on its part.

5.7.
Similarly to the failure to consider suspension, the failure by Link to understand the

significance of the liquidity problems meant that it also failed to proactively manage

what information should be provided to unitholders and putative investors about

the increased risks caused by holding large levels of illiquid assets. Whilst Link

should have been running the WEIF in a way that avoided the risks which arose,

the fact that it failed to appreciate the scale of risk meant that it was unable to

appropriately update investors and supervisors of the Authority in any informed

way about the increased risks. Had Link recognised the problems earlier, it could

have taken appropriate action, including how to keep investors appropriately

informed about the emerging issues. The fact that suspension was a surprise to

investors, as well as to others, increased the impact to unitholders most of whom

were retail investors unable to access their money, when many would have been

reliant upon the money held within the WEIF.

5.8.
Link was reliant upon WIM to update it on individual investors and their intentions.

This included KCC. Had Link been more proactive in understanding the likelihood

of redemptions, it would have been able to manage this redemption and others

better. It was also naïve of Link to rely upon a view that, if KCC redeemed, it would

do so in tranches rather than in full.

5.9.
The first mover advantage created by the poor liquidity was exacerbated by the

failure of Link to adequately monitor how redemptions were being met by WIM and

to help prevent further deterioration of liquidity which they could have done by

requiring assets to be sold down equally across the liquidity profile. Had vertical

slicing been required by Link, the WEIF’s liquidity would not have deteriorated in

the manner in which it did.

5.10. The liquidity thresholds were inappropriate in light of the redemption policy and

metrics adopted. They were set in such a way that action would only be required

when it was already too late.

5.11. Link failed to consider suspension of the fund at an earlier stage to protect the

remaining investors. Further, in October 2018, Link received an independent report

which specifically highlighted a flaw with the WEIF’s liquidity methodology. Again,

Link failed to act. The consequence was that the WEIF’s most liquid assets were

realised to meet redemptions, unfairly leaving behind only the most illiquid assets

for the remaining investors. This resulted in the further deterioration of the liquidity

profile of the WEIF.

Specific Failings in respect of Link’s Analysis

5.12. Participation Rate: Link used a 100% Participation Rate for the WEIF in respect of

its Liquidity Buckets Metric, however it adopted a Participation Rate of 25% in

respect of its T+ and Redemption Metrics, and a 20% Participation Rate for the T+1

metric. No satisfactory explanation has been given for the use of the 100%

Participation Rate. Insofar as Link has suggested that the use of this extreme and

unrealistic metric was compensated for by its use of the supposedly balancing Full

Allocation metric, this is incorrect as a matter of statistical analysis (and there is in

any event no reason why the use of one unrealistic metric should be justified by

the purportedly compensating use of another unrealistic metric). The Participation

Rate assumption is a highly significant one:

(a)
Had Link used a Participation Rate of 25% for the Liquidity Bucket

Metrics (and assuming they had also altered the Full Allocation metric

to a Linear Allocation metric), thereby mirroring its methodology for the

T+
and
Redemption
Metrics,
the
thresholds
that
Link

contemporaneously set against this metric would have been breached

from July 2018.

(b)
Had Link used a Participation Rate of 20% for the Liquidity Bucket

Metrics (and assuming it had also altered the Full Allocation metric to a

Linear Allocation metric), thereby mirroring its methodology for all other

funds for which it acted as ACD at the time, the thresholds that Link

contemporaneously set against this metric would have been breached

from January 2018.

5.13. The use of inappropriate Participation Rates led to an unjustifiably positive

assessment of the WEIF’s liquidity.

5.14. The issue of the 100% participation rate formed subject of comment in a s166

report issued by a skilled person on 19 October 2018 in relation to various issues

regarding the activities of Link. The skilled person observed in the report about the

100% market participation rate being an optimistic assumption in the context of a

sell off. It also noted that the participation rate was outside the normal market

practice, where 20-30% participation is typically assumed. Despite warnings

contained in the skilled person’s report of 19 October 2018 concerning the use of a

100% participation rate, and a recommendation that Link revisit this, no changes

were made.

Inappropriate liquidity limits

5.15. As set out in paragraph 4.31 and 4.36 above, Link imposed the following liquidity

limits on the WEIF’s NAV during 2018:

(a)
Bucket 1 (T+1 - T+7) – no lower than 5% (“amber” warning at 8%).

(b)
Bucket 4 (T+181 - T+363+) – no higher than 35% (“amber” warning

at 30%).

(c)
Buckets 3 and 4 (T+31 – T+363+) – no higher than 70% (“amber”

warning at 65%).

5.16. Link decided to suspend the fund in June 2019 and therefore had determined that

the contingency plan was not the appropriate way to resolve the issues. Had the

limits set been appropriate in practice, it should have been possible for Link to

ensure that the contingency plans were workable and implemented before having

to suspend. The fact that Link decided to suspend, rather than require initiation of

the plans, demonstrates the inappropriateness of the red / amber limits being: (a)

set at the level they were; and/or (b) calculated in the manner that they were, in

particular by reference to the Participation Rates addressed in paragraphs 5.12 –

5.13 above.

5.17. Link used an incomplete data set for its liquidity calculations. The data relied on

was based on the “ALL_BROKERS_ADV_TOT_AGGR _VOL” Bloomberg field, which

reflects the total volume of shares advertised by all brokers for one specific

exchange, and not the total volume of shares traded across all exchanges a security

is quoted on.

Inappropriate ADTV Period

5.18. Link fixed the ADTV traded volume as at March 2017 for the Initial Four Bucket

Model, which would have provided an increasingly outdated view on liquidity.

Inadequate stress testing

5.19. For the reasons set out in section E and paragraphs 4.135 – 4.140 and 5.3(d)

above, the stress-testing conducted by Link was inadequate. In particular:

(a)
more unlikely scenarios should have been used for the purposes of

identifying stressed but plausible scenarios in respect of the ADTV of the

securities held by the WEIF for the reasons set out at paragraphs 4.136

– 4.138 above; and

(b)
the stress testing set out at paragraphs 4.139 – 4.140 above (or stress

testing using similar appropriate parameters) should have been carried

out. Had adequate stress-testing been conducted, it would have become

apparent that the WEIF was not able to withstand stressed but plausible

scenarios.

5.20. Without other market factors in play, the redemption of KCC, albeit a significant

investor, should not have led to an “extreme” scenario if the WEIF had an

appropriate liquidity profile. It should not have taken the actual redemption request

by KCC for Link to recognise that the liquidity profile had become inappropriate.

The potential need for a suspension if KCC redeemed its funds should, through

adequate stress testing, have been appreciated well before the redemption

occurred.

Specific Failings in Respect of Link’s Supervision and Oversight of WIM

5.21. Link communicated to WIM as early as November 2017 that the WEIF’s liquidity

profile was becoming unbalanced with respect to Buckets 1 and 4 and that action

needed to be taken such that the allocations to Bucket 4 could be reduced and

Bucket 1 could be increased. However, the liquidity profile continued to deteriorate

with there being a lack of “vertical slicing” of the portfolio as redemptions

continued. The subsequent limits imposed by Link in May 2018 were meant to be

a backstop position that prevented the liquidity of the WEIF from deteriorating any

further, as liquidity had continued to deteriorate in early 2018, as more liquid

securities were sold to meet redemptions of just over £1 billion in the first four

months of the year. Instead, the limits became a framework (both at WIM and Link)

within which the WEIF was run. They therefore became a key factor in preventing

a fundamental rebalancing of the portfolio as WIM insisted on managing within the

limits and Link failed properly to challenge WIM’s approach and attitude. The

inappropriate nature of the limits therefore failed to tackle the root cause of the

issue, meaning that by June 2019 the WEIF held insufficient liquidity to be able to

continue after KCC’s redemption.

5.22. In particular, when Link approved the change in the Liquidity Bucket Metric in

September 2018 from ADTV on the primary market in which a security was traded

to the amended measure of the ADTV across all markets on which that security was

traded, it should have recognised the fact that this required the relevant triggers

and limits to be adjusted downwards to reflect the nature of the newly approved

metric and ensured that this change was implemented.

5.23. Further, Link should have recognised that the new model involved ceasing to

monitor or place reliance at all on the two metrics – Link’s Amivest Metric and WIM’s

T+20 metric, which had hitherto been part of the monitoring programme and which

were identifying, and were likely to continue (and did in fact continue) to identify

breaches of what had been relevant triggers and limits.

5.24. Link should not have permitted the relevant Liquidity Metrics to be amended such

that three relevant Metrics which had hitherto been part of the monitoring

programme, and which were identifying, and were likely to continue to identify,

breaches of what had been relevant triggers and limits, were altered or removed,

with the result that the Liquidity Metrics purported to show that relevant triggers

and limits were not, and were not likely to be, breached. This was particularly so

in the light of the deteriorating performance and liquidity of the WEIF which clearly

established that such a relaxation of prudency requirements was inappropriate.

5.25. In particular, Link should not have permitted what became the leading measure of

liquidity (i.e. the 4-Bucket Liquidity Model) to be calculated by reference to

unrealistic metrics (i.e. a 100% Participation Rate and a Full Allocation Method)

which it did not apply to its other Contemporaneous Liquidity Metrics for the WEIF.

5.26. Further, having recognised and clearly communicated to WIM by its email of 20

September 2018 “the need to improve the overall liquidity profile of the fund” and

for the “fund to be rebalanced to a considerably more liquid profile”, Link failed to

enforce and require the necessary actions to be taken to achieve this result, instead

implicitly
accepting
and
failing
properly
to
challenge
WIM’s
assertive

communications that it did not agree with and had not agreed with this conclusion.

5.27. Despite asserting on 24 September 2018 that “[Link] continue to press the need

for a long term rebalancing of the portfolio to a more liquid overall profile as well

as a reassessment and reformulation of an effective liquidity monitoring framework

for [the WEIF]” Link failed to ensure that appropriate steps were identified and

actioned.

5.28. Having again informed WIM, on 26 September 2008, that WIM and Link needed to

“work together to formulate a proposal for a more refined liquidity management

framework” and “acknowledge the need to rebalance the portfolio in the longer

term (6m +) to a more balanced liquidity profile appropriate for a daily dealing

UCITS fund”, and requiring WIM to “advise [Link] of their plan to achieve this”, Link

failed to enforce and require the necessary actions to be taken to achieve this

result, instead implicitly accepting and failing properly to challenge WIM’s assertive

communications that it did not “believe that there is a need to rebalance the

portfolio to a more liquid one over the longer term”.

5.29. Further, having informed WIM on 10 December 2018 that “[Link’s] position is that

we expect WIM to be undertaking prompt action to address … liquidity concerns

with the ultimate goal of bringing the hard to value assets down from 19% to less

than 10% and for the portfolio to return to a more balanced position between the

four liquidity buckets”, Link failed to ensure that appropriate steps were identified

and actioned (despite being aware that WIM had promised, but never provided, a

detailed response to its email).

5.30. Further, on 28 and 29 March 2019 and 4 April 2019, having again required WIM to

identify “concrete actions that have been or will be taken to improve the combined

buckets 3 and 4 metric, particularly if the 70% limit is breached”, Link implicitly

accepted and failed properly to challenge WIM’s assertive communications that it

did not agree with and had not agreed with this conclusion (although Link did at

least object to WIM’s proposal that the relevant Liquidity Metrics should be yet

further amended).

Conclusion on liquidity

5.31. By reason of the matters set out in paragraphs 5.3 – 5.30 above, during the period

from 31 July 2018 to 3 June 2019:

(a)
In breach of Principle 2, Link failed to exercise due care skill and

diligence as ACD in its oversight of the liquidity profile of the WEIF;

(b)
In breach of Principle 6, Link failed to pay due regard to the interests of

its customers and treat them fairly. Link placed the interests of one

group of unitholders (those who redeemed between 1 November 2018

and 3 June 2019) above the interests of another group of unitholders

(those who remained) and failed to ensure that the unitholders of the

scheme were treated fairly;

The TISE securities

5.32. The WEIF invested in the TISE securities including after they were listed as follows:

(a)
Sabina listed on TISE on 28 December 2017;

(b)
Ombu listed on TISE on 15 June 2018;

(c)
Industrial Heat listed on TISE on 5 October 2018;

(d)
Proton Partners listed on NEX on 29 February 2019; and

(e)
Benevolent listed on TISE on 21 March 2019.

5.33. Although ACDs are not usually expected to be involved in an underlying asset's

corporate actions, including listing on exchange, Link failed to give adequate

consideration to the potential implications for the WEIF’s liquidity profile where

businesses which the WEIF had holdings in announced an intention to convert from

unlisted status to becoming listed on an exchange. Link did not adequately

consider, or act upon, the risks created if other companies were able to use the

same process that Sabina had used to enable WIM to continue to invest. It was

recognised within Link that there were risks created should this happen. Despite

this clear and obvious risk, Link failed to engage appropriately with WIM to

understand what future plans other investments within the WEIF portfolio might

have had. WIM was able to use the process as it chose, without prior notification

to Link or prior permission. It was entirely foreseeable by Link that the use of the

‘intention to list’ process increased liquidity risks. It created an ability to invest in

more assets within the WEIF which were of the same characteristic in liquidity terms

as unquoted assets. WIM capitalised on this opportunity not only to continue to

hold the assets once they had been removed from the 10% unquoted restrictions

but, significantly, in some cases to increase the holdings in the TISE assets above

the amount originally held. By allowing this process to be used by WIM, without

adequately considering the implications of doing so, Link allowed an increased level

of fair value and illiquid assets to be held within the Fund. This increased the risks

of liquidity issues arising. Link should have been fully aware of that and acted to

prevent the repeated use of this process by WIM.

5.34. By enabling WIM to focus on bucket levels and maintenance of those levels, rather

than requiring a rebalance of the buckets, Link missed the opportunity to prevent

further investments in illiquid assets. Had Link required a focus on significant and

urgent reductions in buckets 3 and 4 and rebalancing to bucket 1, including by

ensuring that no new investments could be made, or additional funding provided

within those buckets, the liquidity risks could have been reduced at a much earlier

stage. An absolute moratorium on any further investments in fair value assets

within the WEIF could have been required by Link. It failed to take that step and

missed an opportunity to help prevent further deterioration in the WEIF’s liquidity.

6.
SANCTION

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of

DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority

applies a five-step framework to determine the appropriate level of financial

penalty. DEPP 6.5A sets out the details of the five-step framework that applies in

respect of financial penalties imposed on firms.

6.2.
The Authority has calculated the financial penalty which it considers would be

appropriate in this case on this basis, as follows.

6.3.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the

financial benefit derived directly from the breaches where it is practicable to

quantify this.

6.4.
Where a firm agrees to carry out a redress programme to compensate those who

have suffered loss as a result of the breach, or where the Authority decides to

impose a redress programme, the Authority will take this into consideration. Link

has agreed to implement a scheme of arrangement which is envisaged to involve

the payment of restitution which, it is envisaged, will exceed any financial benefit

derived by Link.

6.5.
Step 1 is therefore £0.

Step 2: The seriousness of the breaches

6.6.
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that reflects

the seriousness of the breaches. Where the amount of revenue generated by a

firm from a particular product line or business area is indicative of the harm or

potential harm that its breaches may cause, that figure will be based on a

percentage of the firm’s revenue from the relevant products or business area.

6.7.
The Authority considers that the revenue generated by Link is an indicator of the

harm or potential harm caused by its breaches. The Authority has therefore

determined a figure based on a percentage of Link’s relevant revenue. Link’s

relevant revenue is the revenue derived by LFS during the period of the breaches.

The period of Link’s breaches was from 31 July 2018 to 3 June 2019. Where a

breach lasts less than 12 months, the relevant revenue will be that derived by the

firm in the 12 months preceding the end of the breach (DEPP 6.5A.2G(2)). The

Authority accordingly considers Link’s relevant revenue to be £42,073,475.

6.8.
In deciding on the percentage of the relevant revenue that forms the basis of the

step 2 figure, the Authority considers the seriousness of the breach and chooses a

percentage between 0% and 20%. This range is divided into five fixed levels which

represent, on a sliding scale, the seriousness of the breach; the more serious the

breach, the higher the level. For penalties imposed on firms there are the following

five levels:

(a)
Level 1 – 0%

(b)
Level 2 – 5%

(c)
Level 3 – 10%

(d)
Level 4 – 15%

(e)
Level 5 – 20%

6.9.
In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly. DEPP 6.5A.2G(11) lists factors likely to be considered

‘level 4 or 5 factors’. Of these, the Authority considers the following factors to be

relevant:

(a)
Link’s breaches caused a significant loss or risk of loss to a large number

of
individual
consumers
and
investors,
causing
considerable

inconvenience and distress to those invested in the WEIF at the time of

the suspension. Many of the holders of the £3.5 billion NAV of the WEIF

at that time were retail investors.

(b)
Link’s breaches have had an adverse effect on confidence in financial

services markets.

6.10. DEPP 6.5A.2G(12) lists factors likely to be considered ‘level 1, 2 or 3 factors’. Of

these, the Authority considers the following factors to be relevant:

(a)
Little, or no, profits were made or losses avoided as a result of the

breaches.

(b)
Link’s breaches were committed negligently or inadvertently.

6.11. The impact of Link’s breaches was extremely serious, in particular:

(a)
As above, the breaches caused significant loss and risk of loss to

investors;

(b)
Link’s breaches resulted in considerable inconvenience and distress to

underlying investors in the WEIF; and

(c)
The failure of the WEIF has had an adverse effect on financial services

markets, in particular by damaging consumer confidence in the fund

management sector.

6.12. Taking all of these factors into account, the Authority considers the seriousness of

Link’s breaches to be level 4 and so the Step 2 figure is 15% of £42,073,475.

6.13. Step 2 is therefore £6,311,021.

Step 3: Mitigating and aggravating factors

6.14. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breaches.

6.15. The Authority considers that the following factors aggravate the breaches:

(a)
The firm’s previous disciplinary record and general compliance history,

including:

a.
On 13 November 2012, Link, under its former name of Capita Financial

Managers Limited (“CFM”), was given a public censure for breaches of

Principles 2 and 3 and various of the COLL rules between June 2006

and March 2009 in connection with failures in its oversight, as ACD, of

the CF Arch cru Investment Funds and the CF Arch cru Diversified

Funds (“the Arch cru Funds”). The Arch cru Funds were retail

investment funds which invested in various cells of a Guernsey-

incorporated company, listed on the Channel Islands Stock Exchange.

Trading in the Arch cru Funds was suspended in March 2009 and the

Arch cru funds were subsequently wound up. The FSA found that Link

had, inter alia, failed adequately to monitor the liquidity of the Arch

cru Funds. As part of the settlement reached with the FSA, Link agreed

voluntarily to contribute £32 million towards a £54 million payment

scheme. The Final Notice stated that “The serious nature of the

breaches identified in this Notice would ordinarily have led the FSA to

impose a penalty of £4.025 million after the application of a 30%

discount for early settlement. However, in light of the specific

circumstances of this case…, the FSA has decided that it is not

appropriate to impose a financial penalty on CFM”; and

b.
On 10 November 2017 Link again under its former name of CFM, was

given a public censure for breaches of Principles 2 and 7 in relation to

its failures in its oversight, as operator, of the Connaught Income

Fund, Series 1 (“the Connaught Fund”) between 7 April 2008 and 25

September 2009. The Connaught Fund was an unregulated collective

investment scheme which invested in short-term property bridging

loans. It was suspended in March 2012 and subsequently wound up.

The Final Notice noted that there was agreement to pay up to £66m

in redress and stated that “The Authority has taken account of the fact

that CFM itself would not have been able to make [that] payment …

and that this will only be possible with the financial support given to

CFM by its ultimate parent, Capita plc…. Had it not been for CFM’s

(with the assistance of its ultimate parent company, Capita plc)

agreement to make the payment then the Authority would have

imposed a financial penalty of £15 million. In that event CFM would

have qualified for a 30% discount (stage 1) in accordance with the

Authority’s executive settlement procedure, which would have reduced

the penalty to £10.5 million.”

c.
Link’s failure to make changes to its participation rate after a s166

report was issued that recommended it do so during the Relevant

Period. A s166 report issued on 19 October 2018, found that the firm

used inappropriate participation rates for its liquidity monitoring

(including of the WEIF). Despite the firm being informed of this, it took

no action to remediate the position and then suspended the WEIF on

3 June 2019.

d.
The Authority considers that Link’s failings: (a) materially contributed

to the risk that suspension would be required; and (b) placed those

investors who did not redeem prior to the point of suspension at a

disadvantage. The ‘first mover advantage’ for those redeeming earlier

was exacerbated by the failure of Link to adequately monitor how

redemptions were being met by WIM and to help prevent further

deterioration of liquidity. More liquid assets were sold to meet

redemptions exacerbating the decline in liquidity. Link could have

managed the liquidity issues which arose in a number of ways,

including requiring assets to be sold down equally across the liquidity

profile, referred to as vertical slicing. This would have prevented a

disproportionate sale of the most liquid assets. Had vertical slicing

been required by Link, the WEIF’s liquidity would not have deteriorated

in the manner in which it did.

6.16. Having taken into account these aggravating factors, the Authority considers that

the Step 2 figure should be increased by 55%.

6.17. Step 3 is therefore £9,782,083.

Step 4: Adjustment for deterrence

72

6.18. Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after Step

3 is insufficient to deter the firm who committed the breach, or others, from

committing further or similar breaches, then the Authority may increase the

penalty.

6.19. The Authority does not consider that the Step 3 figure of £9,782,083 represents a

sufficient deterrent in the circumstances of this case, either generally or to Link

which acted as ACD to some 175 funds during the Relevant Period.

6.20. Link’s serious failure to manage properly the liquidity of one of the funds it

supervised as ACD following its previous serious failings (when known as CFM) in

respect of the Arch Cru Funds and the Connaught Fund has further exposed many

thousands of investors to the risk of, and actual, significant detriment. It has also

undermined public confidence in the funds industry. At the time of its suspension

on 3 June 2019, the WEIF was valued at just over £3.5 billion. Since then, the value

of many of the WEIF’s holdings have reduced significantly on realisation, meaning

that investors (nearly three quarters of whom were retail investors) have received,

or will receive, significantly less than the value of their investments at the point of

suspension. These losses were unfairly and disproportionately borne by those

investors who did not redeem early and were left with a fund with an illiquid rump

of unquoted assets. The Authority regards these circumstances as a matter of

significant importance when considering the need for credible deterrence.

6.21. One of the Authority’s stated objectives when introducing the penalty policy on 6

March 2010 was to increase the level of penalties to ensure credible deterrence.

The Authority considers that penalties imposed under this policy should be

materially higher than penalties for similar breaches imposed pursuant to the policy

applicable before that date, which were applicable when disciplinary action was

taken against the firm in relation to its serious Arch cru and Connaught failings.

6.22. The Authority considers that for credible deterrence purposes the penalty imposed

for the failings in this Notice should as a minimum significantly exceed the level of

the penalty that would have been imposed on Link in 2012 and again in 2017 in

respect of its failings in respect of the Arch cru Funds and the Connaught Fund

respectively had it not been for the substantial payments by way of redress made

on each of those occasions.

6.23. Accordingly, the Authority considers that in order to achieve its objective of credible

deterrence, the Step 3 figure should be increased to £50,000,000.

6.24. Step 4 is therefore £50,000,000.

Step 5: Settlement discount

6.25. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to be

imposed agree the amount of the financial penalty and other terms, DEPP 6.7

provides that the amount of the financial penalty which might otherwise have been

payable will be reduced to reflect the stage at which the Authority and the firm

reached agreement. The settlement discount does not apply to the disgorgement

of any benefit calculated at Step 1.

6.26. Had the Authority and Link reached agreement on the appropriate penalty at Stage

1 of the settlement process, a 30% discount would have been applied to the Step

4 figure.

6.27. Step 5 would in those circumstances have been £35,000,000.

Proposed sanction

6.28. In accordance with the above, were it not for the factors outlined below, the

Authority would have proposed to impose a financial penalty of £50,000,000 (or

£35,000,000 if settled) on Link for breaching Principle 2 and Principle 6.

6.29. However, Link has agreed to implement the Scheme, under which restitution will

be payable. The Scheme will involve the disposal by Link of substantially all of its

value and, because it includes an additional significant voluntary contribution from

Link’s ultimate parent, LAHL, will result in the payment of restitution above what

would otherwise be available to Link.

6.30. The Authority is satisfied that the additional imposition of a financial penalty would

reduce the amount of restitution available to be paid by Link. As a result, instead

of imposing a financial penalty, the Authority hereby publishes a statement of Link’s

misconduct, pursuant to section 205 of the Act, in the form of this Final Notice. The

Final Notice is published on the Authority’s website on 11 April 2024.

7.
RESTITUTION

7.1.
Under section 384 of the Act, the Authority has the power, if it is satisfied that a

person has contravened a relevant requirement and that one or more persons have

suffered loss or been otherwise adversely affected as a result of the contravention,

to require the person concerned to pay to the appropriate person or distribute

among the appropriate persons, such an amount as appears to the Authority to be

just having regard to the extent of the loss or other adverse effect. The Authority

has published guidance on the exercise of its power under section 384 of the Act in

Chapter 11 of the Enforcement Guide.

7.2.
For the reasons outlined above, the Authority considers that, during the relevant

period, Link breached Principle 2 and Principle 6. As rules made under the Act,

Principle 2 and Principle 6 are each relevant requirements for the purposes of

section 384 of the Act.

7.3.
As a result of Link’s failure to ensure that redemptions from the WEIF were met by

the liquidation of assets with liquidity profiles proportionate to the total assets held

by the WEIF, the Authority considers that the assets held by the WEIF at the time

of its suspension were disproportionately illiquid by comparison with the assets held

at 1 November 2018.

7.4.
This meant that those investors who continued to hold investments in the WEIF at

the time of its suspension were disproportionately affected by the significant

reduction in value of the assets remaining in the WEIF at the point of its suspension

and subsequent liquidation.

7.5.
Had Link suspended the WEIF earlier, when its deteriorating liquidity was apparent,

rather than allowing early redeemers to take the benefits of the sale of the WEIF’s

liquid assets, and leaving those that remained with progressively more

concentrated holdings of less liquid assets whose earlier recorded NAVs could not

ultimately be realised upon sale, those investors who remained in the fund in June

2019 would have incurred significantly lower losses.

7.6.
Given the above, the Authority considers that part of the losses incurred by

investors who remained invested in the WEIF at the time of its suspension were

suffered as a result of Link’s contraventions of relevant requirements.

7.7.
The Authority considers that an appropriate means to assess these losses is to

compare the difference between the monies that the investors in the WEIF at the

time of suspension have received or are estimated to receive on liquidation of the

WEIF with what they would have received had the proceeds of the sale of assets

realised between November 2018 and the suspension of the WEIF been shared

equally between those who redeemed their investments during that period and

those who remained invested in the WEIF at the time of suspension.

7.8.
The Authority has calculated that, using this approach, those investors who

remained invested in the WEIF at the time of its suspension would have received

an additional £298,403,919 had all investors received a fair and proportionate

share of the proceeds of the asset sales.

7.9.
The Authority has assessed this sum by calculating the share in the proceeds of the

WEIF’s assets which were sold after November 2018 which would have been

received by those investors who remained invested at the point of suspension had

the proceeds of total asset sales been divided fairly among all investors.

7.10. In the circumstances, having regard to the extent of the losses, it appears to the

Authority to be just to require Link to pay to those investors in the WEIF who lost

money as a result of Link’s failures.

7.11. The Authority therefore considers that Link should pay restitution to reflect the

losses incurred as a result of its contraventions of relevant requirements.

7.12. Link has agreed to implement the Scheme, under which substantially all of its value

will be used to contribute to a redress scheme. In addition, LAHL has agreed to

make a significant voluntary contribution to the Scheme.

7.13. Accordingly, the Authority hereby requires Link to pay restitution of £298,403,919,

or such lesser sum as is payable under the Scheme, to the WEIF for the benefit of

Relevant Investors in accordance with arrangements specified in the Scheme.

76

8.
PROCEDURAL MATTERS

8.1.
This Notice is given to Link under, and in accordance with, section 390 of the Act.

Decision maker

8.2.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

Manner and time for payment

8.3.
Link must pay the restitution required by this Final Notice to the WEIF pursuant to

the terms of, and within the period specified by, the rules of the Scheme.

8.4.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority may

not publish information if such publication would, in the opinion of the Authority,

be unfair to Link or prejudicial to the interests of consumers or detrimental to the

stability of the UK financial system.

8.5.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

8.6.
For more information concerning this matter generally, contact Ross Murdoch

(direct line: 020 7066 3999/email: ross.murdoch@fca.org.uk) or Natalie Birtle

(direct line: 020 7066 6856/email: natalie.birtle@fca.org.uk) at the Authority.

Financial Conduct Authority, Enforcement and Market Oversight Division


ANNEX A - RELEVANT STATUTORY AND REGULATORY PROVISIONS

FINANCIAL SERVICES AND MARKETS ACT 2000

s.1B- The FCA’s general duties:

1. In discharging its general functions the FCA must, so far as is reasonably possible, act

in a way which –

(a)
is compatible with its strategic objective, and

(b)
advances one or more of its operational objectives.

2. The FCA's strategic objective is: ensuring that the relevant markets (see section 1F)

function well.

3. The FCA's operational objectives are –

(a)
[…];

(b)
the integrity objective (see section 1D);

(c)
[…]

s.1D- The integrity objective:

4. The integrity objective is: protecting and enhancing the integrity of the UK financial

system.

5. The “integrity” of the UK financial system includes –

(a)
its soundness, stability and resilience,

(b)
its not being used for a purpose connected with financial crime,

(c)
its not being affected by contraventions by persons of Article 14 (prohibition

of insider dealing and of unlawful disclosure of inside information) or Article

15 (prohibition of market manipulation) of the market abuse regulation,

(d)
the orderly operation of the financial markets, and

(e)
the transparency of the price formation process in those markets.

s.206 – Financial penalties:

6. If the Authority considers that an authorised person has contravened a relevant

requirement imposed on the person, it may impose on him a penalty, in respect of the

contravention, of such amount as it considers appropriate.

PRINCIPLES FOR BUSINESSES

7. The Principles are a general statement of the fundamental obligations of firms under

the regulatory system and are set out in the Authority’s Handbook. They derive their

authority from the Authority’s rule-making powers set out in the Act. The relevant

Principles are as follows:

A firm must conduct its business with due skill, care and diligence.

A firm must pay due regard to the interests of its customers and treat them fairly.

THE COLLECTIVE INVESTMENT SCHEMES SOURCEBOOK (“COLL”)

8. Link was required to comply with relevant rules and have regard to guidance set out

in COLL which included the following:

COLL 5.1.2G:

(1)
This chapter [Chapter 5] helps in achieving the statutory objective of

protecting consumers by laying down minimum standards for the

investments that may be held by an authorised fund. In particular:

i. the proportion of transferable securities and derivatives that may be held

by an authorised fund is restricted if those transferable securities and

derivatives are not listed on an eligible market; the intention of this is to

restrict investment in transferable securities or derivatives that cannot be

accurately valued and readily disposed of; and

ii. authorised funds are required to comply with a number of investment

rules that require the spreading of risk.

COLL 5.2.3R(1):

“An [AFM] must ensure that, taking account of the investment objectives and policy

of the UCITS scheme as stated in the most recently published prospectus, the

scheme property of the UCITS scheme aims to provide a prudent spread of risk.”

COLL 5.2.7AR(1)(c):

“A UCITS scheme may invest in a transferable security only to the extent that…

reliable valuation is available for it as follows:

i. in the case of a transferable security admitted to or dealt in on an eligible

market, where there are accurate, reliable and regular prices which are

either market prices or prices made available by valuation systems

independent from issuers;

ii. in the case of a transferable security not admitted to or dealt in on an

eligible market, where there is a valuation on a periodic basis which is

derived from information from the issuer of the transferable security or

from competent investment research;”

COLL 5.2.8R (3):

“Transferable securities and approved money-market instruments held within a

UCITS scheme must be:

a) admitted to or dealt in on an eligible market within COLL 5.2.10 R

(1)(a) (Eligible markets: requirements); or

b) dealt in on an eligible market within COLL 5.2.10 R (1)(b); or

c) admitted to or dealt in on an eligible market within COLL 5.2.10 R (2);

or

d) for an approved money-market instrument not admitted to or dealt in

on an eligible market, within COLL 5.2.10AR (1); or

e) recently issued transferable securities, provided that:

i.
the terms of issue include an undertaking that application will

be made to be admitted to an eligible market; and

ii.
such admission is secured within a year of issue.

COLL 5.2.8R (4):

However, a UCITS scheme may invest no more than 10% of the scheme property

in transferable securities and approved money-market instruments other than

those referred to in (3).

COLL 6.1.2G

This chapter helps in achieving the statutory objective of protecting consumers. It

provides the operating framework within which the authorised fund must be

operated on a day-to-day basis to ensure that clients are treated fairly when they

become, remain or as they cease to be unitholders.

COLL 6.2.2G:

(1) “… the statutory objective of securing an appropriate degree of protection for

consumers. In accordance with Principle 6, this section is also concerned with

ensuring the authorised fund manager pays due regard to its clients' interests

and treats them fairly.

(2) An authorised fund manager of an AUT, ACS or ICVC is responsible for

arranging for the issue and the cancellation of units for the authorised fund. An

authorised fund manager of an AUT, ICVC or co-ownership scheme is permitted

to sell and redeem units for its own account. An authorised fund manager of a

limited partnership scheme is only permitted to sell and redeem units as agent

for the scheme. The rules in this section are intended to ensure that the

authorised fund manager treats the authorised fund fairly when arranging for

the issue or cancellation of units, and treats clients fairly when they purchase

or sell units….

COLL 6.6A.2(1)-(2):

“An [AFM] of a UCITS scheme must:

(1) ensure that the unitholders of any such scheme it manages are treated fairly;

and

(2) refrain from placing the interests of any group of unitholders above the

interests of any other group of unitholders;”

COLL 6.2.9R(1) and (2):

(1) As the authorised fund manager normally controls the issue, cancellation, sale

and redemption of an authorised fund's units, it occupies a position that could,

without appropriate systems and controls, involve a conflict of interest

between itself and its clients.

(2) SYSC 3.1.1 R (Systems and controls) requires that a firm take reasonable care

to establish and maintain such systems and controls as are appropriate to its

business and Principle 8 requires a firm to manage conflicts of interest

between itself and a customer fairly.

COLL 6.12.12R:

“an [AFM] … must ensure that, for each UCITS it manages, the liquidity profile of

the investments of the scheme is appropriate to the redemption policy laid down in

the instrument constituting the fund or the prospectus.”

COLL 6.6.14 (1):

“The authorised fund manager must avoid the scheme property being used or

invested contrary to COLL 5, or any provision in the instrument constituting the

fund or the prospectus as referred to in COLL 5.2.4 R (Investment powers:general),

and COLL 5.6.4 R (Investment powers: general), except to the extent permitted

by (3)(b).”

COLL 6.6.14 (2):

“The authorised fund manager must, immediately upon becoming aware of any

breach of a provision listed in (1), take action, at its own expense, to rectify that

breach, unless the breach occurred as the result of any of the circumstances within

(3).”

COLL 6.6.14 (3):

“The authorised fund manager must restore compliance with COLL 5 as soon as

reasonably practicable having regard to the interests of the unitholders and, in any

event, within the period specified in (5) or, when applicable, (6) where:

(a)
the scheme property is:

i. used or invested contrary to COLL 5 (other than a provision excusing a

failure to comply on a temporary basis); and

ii. the contravention is beyond the control of both the authorised fund

manager and the depositary; or

(b)
there is a transaction ("subsequent transaction") deriving from a right

(such as the right to convert stock or subscribe to a rights issue)

attributable to an investment ('original investment') of the scheme if:

i. the subsequent transaction, but for this rule would constitute a breach

of COLL 5; and

ii. at the time of the acquisition of the original investment, it was

reasonable for the authorised fund manager, to expect that a breach

would not be caused by the subsequent transaction; and

iii. in this rule the reference to the exercise of a right includes the taking

effect of a right without any action by or on behalf of the depositary or

the authorised fund manager.”

COLL 6.6.14 (5)(a):

“The maximum period for restoration of compliance under (3) starts at the date of

discovery of the relevant circumstance and lasts, subject to any extension under

(6), for six months”.

(1) An authorised
fund
manager must
employ
an
appropriate liquidity

risk management process in order to ensure that each UCITS it manages is able

to comply at any time with COLL 6.2.16 R (Sale and redemption).

(2) Where appropriate, the authorised fund manager must conduct stress tests to

enable
it
to
assess
the liquidity
risk of
the UCITS under
exceptional

circumstances.

COLL 6.2.16R(3):

Subject to COLL 6.2.19 R (Limited redemption) and COLL 6.2.21 R (Deferred

redemption), the authorised fund manager must, at all times during the dealing

day, on request of any qualifying unitholder, effect the redemption of units in

accordance with the conditions in the instrument constituting the fund and

the prospectus unless it has reasonable grounds to refuse such redemption.