Anger as majority of LCF bondholders may miss out on compensation
The Financial Services Compensation Scheme has announced that only a very small number of the 11,600 investors who ploughed £236m into the failed mini-bond pedalled by collapsed investment group London Capital & Finance will definitely receive any compensation.
It said that just 159 bondholders, 1.4% of the total, would certainly be compensated leaving a large number of first-time investors and retirees who bought the unregulated bonds furious and facing an agonising wait to find out if their investment will be wiped out.
FSCS will review each individual claim to determine whether investors received misleading advice, but warned that ‘many customers will not be eligible for compensation on this basis’.
LCF itself was regulated, but by definition, mini-bonds currently are not and thus not generally covered by the FSCS, unless the investment was recommended by a regulated adviser.
‘It does not seem a fair or right outcome’
The LCF bondholders have created an action group, and a scan of its Twitter feed – @LCFBondholders –gives a sense of their mood; ‘It does not seem a fair or right outcome,’ said one, adding that investors are ‘trying to make sense’ of the FSCS announcement but that the general reaction ‘is very negative’. ‘There is a strong, arguable case that LCF was engaged in a number of regulated activities, albeit without FCA permission, which resulted in £236m of financial losses and for which there should be compensation.’
FSCS also said that 283 bondholders have been immediately precluded from being compensated because they invested in LCF before June 2016, when the group became authorised by the Financial Conduct Authority.
This scandal highlights the confusion that surrounds the regulation of UK investment products and the role of the compensation scheme; some bondholders claim they even received misleading advice from the FSCS itself before investing.
In making this announcement, Caroline Rainbird, CEO of the FSCS said it is hoping to give another update at the end of February. ‘I regret that LCF investors impacted by the firm’s failure have been waiting several anxious months to find out whether or not they may be eligible to receive compensation from FSCS,’ she said,’I appreciate that the initial decisions and outlook we are announcing today are likely to be disappointing to many LCF customers.’
The 159 investors had switched from ISAs underpinned by stocks and shares to LCF bonds; they will receive compensation by the end of February.
LCF was authorised by the Treasury as an official ISA manager, but the Financial Conduct Authority, which was heavily criticise for missing warning signals around LCF’s business model, took emergency action in December to temporarily ban the promotion of certain mini-bonds to retail consumers.
‘this decision smooths things over for the FCA in that context — but in doing so, it produces illogical and unfair distinctions between investors’
Mini-bonds raise money for small businesses, but unlike retail bonds listed on the LSE’s Order Book for Retail Bonds (ORB), the products can be high risk because of the higher failure rates of those enterprises.
However, precisely because of this risk, mini-bonds can offer attractive headline rates – LCF was promising returns of up to 8% p.a.
The LCF scandal has sparked regulatory and criminal probes as well as a statutory investigation into any mis-steps the FCA took.
Bondholders hope that Dame Elizabeth Gloster, the former judge leading the investigation, will find that the FCA failed in its regulatory duty, which would also trigger a payout.
Thomas Donegan, a lawyer at Shearman & Sterling who has advised some bondholders pro bono told the Financial Times: ‘It is noteworthy how this decision smooths things over for the FCA in that context — but in doing so, it produces illogical and unfair distinctions between investors. ‘Investors who lost out on identical products or based on equally misleading written and online materials, or who invested in ISAs via a subscription or transfer of an external cash ISA will rightly be asking why they are being ignored.’
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