LC&F Bondholders Turn up the Wick as FSCS pays out just £2.7m

Lawyers acting for bondholders of failed London Capital & Finance today commenced legal action against investors’ compensation scheme, the Financial Services Compensation Scheme (FSCS), challenging its refusal to pay out and accusing it of ‘chicanery’.

To date FSCS has only said it will pay victims who transferred their savings into LCF ISA bonds from other providers’ stocks and shares ISAs – just 135 of the 11,600 bondholders; those who transferred from cash ISAs or simply bought the bonds direct are excluded.

Shearman & Sterling which is representing the LCF bondholders’ committee pro bono, is taking the ruling to a judicial review, claiming it was ‘illogical’ and that scheme had ‘made incorrect legal interpretations and, as a result, misdirected itself.’

FSCS only pays out on products that are regulated and says the LCF bonds were sold as ‘non-transferable’ securities, thereby excluding them from regulation.

Shearman & Sterling contests that on the basis that HMRC approved LCF as an ISA provider and, by law, ISAs cannot include non-transferable bonds.

It argues that conflicts in the LCF ISA bonds’ terms, between those provisions asserting non-transferability versus those claiming ISA eligibility (and so requiring transferability), must by law be resolved in favour of consumers.

Partner at Shearman & Sterling, Thomas Donegan, said: ‘LCF was authorised and regulated by the FCA and registered with HMRC as an ISA provider.

‘The FSCS and FCA were set up to protect consumers, fight financial crime and instil confidence in the UK financial sector.

‘Instead, in relation to LCF, these bodies have endorsed dodgy loopholes, attempted to re-label ISA accounts as ‘high risk minibonds’ so as to blame investors, and more generally sought to wash their hands of the affair.

‘We feel confident that the courts will see through their chicanery.’

‘attempted to re-label ISA accounts as ‘high risk minibonds’ so as to blame investors, and more generally sought to wash their hands of the affair’

Meanwhile, FSCS has paid out £2.7m to the small number of investors it identified as being eligible for compensation, at an average of £20,000 each.

FSCS has made these payments automatically to 135 LCF customers in relation to 151 failed mini-bonds; payouts were to investors who put money into LCF mini-bonds via a transfer from their stocks and shares ISAs – a regulated activity unlike unregulated mini-bonds.

The Financial Conduct Authority (FCA) ordered LCF to stop promoting the mini-bonds and deemed the investments ineligible for ISAs in December 2018, the month before LCF entered administration.

ISA investors in LCF mini-bonds who have not received a letter from FSCS by 24th February 2020, are invited to provide evidence to the FSCS about their claim.

11,600 bondholders purchased 16,700 bonds from LCF worth £237m but only ISA investors have so far been told they are definitely covered by the FSCS.

FSCS concluded that some customers were given misleading advice by LCF and so have valid claims for compensation; of advice claims, an FSCS statement said it is ‘continuing to review the evidence we hold’.

Non-ISA mini-bond investors do not need to submit a claim to FSCS, which will provide a further update by the end of March 2020.

Caroline Rainbird, chief executive of the FSCS, says: ‘We appreciate that this is a difficult time for the majority of LCF’s customers who are still waiting to find out if they are entitled to compensation.

‘The FSCS is making progress in finalising its arrangements for reviewing advice claims and is committed to ensuring the process is as quick and as easy as possible for customers.’

Mini-bonds typically offer high returns and this reflects the much higher risks involved compared to other types of investments. A business does not generally have to be regulated by the FCA to issue mini-bonds.

Since 1st January 2020, it is against FCA rules to promote ‘speculative mini-bonds’ to retail consumers, unless they are considered to be ‘sophisticated’ or have a high net worth – more.

An FCA statement says: ‘You should think carefully before investing in a mini-bond, and not invest any money you can’t afford to lose.’