The UK government will establish a scheme to pay 80% of London Capital & Finance (LCF) bondholder’s initial investment up to a maximum of £68,000.
Where bondholders have received interest payments from LCF or distributions from administrators Smith & Williamson, these will be deducted from the sum of compensation payable.
The scheme will be available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme (FSCS) and represents 80% of the compensation they would have received had they been eligible for FSCS protection.
Around 97% of all LCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the government scheme or the FSCS.
The government expects to pay out around £120m in compensation in total and to have paid all bondholders within six months of securing the necessary primary legislation, which it will bring forward as soon as parliamentary time allows.
The FSCS has already given more than £57m in redress to around 2,800 LCF bondholders.
Investors will not need to use a claims management company, solicitor or any other organisation to help them claim.
‘Halo effect’
LCF was a Financial Conduct Authority (FCA) authorised firm which issued unregulated non-transferable debt securities, commonly known as ‘mini-bonds’, to investors and then speculatively invested the funds received in a number of underlying businesses.
The firm went into administration in January 2019 and, at the point of failure, 11,625 bondholders had invested around £237m.
John Glen, economic secretary to HM Treasury, said in a statement on 19 April: “It is an important point of principle that government does not step in to pay compensation in respect of failed financial services firms that fall outside the FSCS. Doing so would create the wrong set of incentives for individuals and an unnecessary burden on the taxpayer. However, the situation regarding LCF is unique and exceptional.
“After considering the issues in detail, the government has decided to establish a compensation scheme for LCF bondholders. The scheme I am announcing today appropriately balances the interests of both bondholders and the taxpayer and will ensure that all LCF bondholders receive a fair level of compensation in respect of the financial loss they have suffered.
“LCF’s business model was highly unusual, both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities.
“This allowed LCF’s unregulated activity of selling mini-bonds to benefit from the ‘halo effect’ of being issued by an authorised firm, helping LCF gain respectability and grow to an unprecedented scale before it failed, resulting in losses for thousands of bondholders.”
An LCF bondholder told Portfolio Adviser sister title International Adviser: “This is the best outcome we could have hoped for. Quite literally, we are ecstatic. A hallelujah moment after a really long fight. We had to ensure we stayed united throughout.
“We are incredibly grateful to the support we’ve had from the press. We hope the process will be as simple as stated and that the parameters don’t change.”
Report
An independent investigation into the FCA’s handling of the scandal led by Dame Elizabeth Gloster was published at the end of last year. It concluded that the FCA did not discharge its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period.
Glen added: “While I have not seen evidence that would indicate that the regulatory failings at the FCA were the primary cause of the losses incurred by LCF bondholders, they are a significant factor that the government has taken into account when deciding to establish this scheme.
“Indeed, the government does not ordinarily step in to pay compensation to consumers in relation to allegations of fraud, investment losses, mis-selling or mis-buying of investments. I would, however, like to make it clear that neither the government nor the FCA accepts any legal liability for the failure of LCF or the losses incurred by its bondholders.
“In these extraordinary circumstances, the government has decided to establish a compensation scheme. However, it is imperative to avoid creating the misconception that government will stand behind bad investments in future, even where FSCS protection does not apply.
“That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking the government will provide compensation if things go wrong. The ultimate responsibility for choosing suitable investments must remain with individuals.”
FCA investigation continues
The FCA is, together with the Serious Fraud Office (SFO), continuing to investigate the circumstances surrounding the sale of mini-bonds issued by LCF, it said in a statement.
The UK regulator acknowledged Gloster’s report and said that it is “very sorry for the errors” it made and has “committed to implementing each of the recommendations” suggested in the review.
It added: “We have identified investors who were given incorrect information in these direct communications with the FCA which may have led them to conclude their investment would be safer than it was. While we do not believe this was the primary cause of these investors’ losses, those direct communications may have been a factor in their decision to invest, or to remain invested.
“While each case will be given individual consideration, given the exceptional circumstances the FCA intends to offer ex gratia payments to the small number of investors who fall into this category who have not already been compensated by the FSCS.
“We will be contacting those investors directly to discuss the details of the payments and how they will interact with the government compensation scheme and any payments made by the FSCS. We will contact investors in this group irrespective of whether they have yet made a complaint to the FCA.
“Complaints by other investors will be considered individually in accordance with the Complaints Scheme. Whilst we do not expect to make ex gratia compensatory payments to these investors, we will be writing to the majority of complainants, acknowledging the errors we made in relation to LCF, reiterating our apology and ensuring they have full information about the government scheme.”
The FCA expects to “provide a response to complainants by the end of June”.
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