Compensation scheme: LCF situation is ‘unique and exceptional’ says the Treasury
The Treasury has announced plans to hand £120million in compensation to around 8,800 mini-bond investors who lost out in the collapse of London Capital & Finance.
The creation of the compensation scheme – which will require legislation – is due to the ‘unique and exceptional nature of the situation’, said the Government.
The Treasury will pay four fifths of an original investment up to a cap of £68,000 to people not already receiving payouts from the Financial Services Compensation Scheme.
LCF’s demise in January 2019 swept away the savings of many elderly and inexperienced investors who were hoodwinked into believing they would receive returns of 8 per cent from tax-free Isas.
The £237million failure of LCF recently sparked a row between the governor of the Bank of England, Andrew Bailey, and a former judge who wrote a damning report into the scandal, Dame Elizabeth Gloster, over whether he had tried to avoid being named as personally responsible.
Bailey was formerly boss of the Financial Conduct Authority, but moved over to lead the Bank last spring.
Mini-bonds have been popular in recent years among people seeking a better return than savings, but wanting to avoid stock market risks and volatility.
You are effectively buying company debt for a set period, in exchange for regular interest payments – but the money you make back depends on the firms issuing them not going bust. Read more here.
In addition to announcing the compensation scheme for investors not covered by FSCS protection, which is capped at £85,000, the Treasury announced a consultation into bringing the issuance of mini-bonds into FCA regulation.
City watchdog bans promotion of speculative mini-bonds
The FCA slapped a permanent ban on firms pushing risky mini-bonds to ordinary investors after thousands lost money.
But there are exemptions to its marketing ban for retail bonds that are heavily traded, companies raising funds for their own commercial or industrial activities, and products which fund a single UK income-generating property investment. Read more here.
LCF itself was authorised by the FCA, but the firm issued mini-bonds which were unregulated to around 11,625 investors, and according to the Treasury then ‘speculatively invested the funds received in a number of underlying businesses’.
investors lost a High Court case over compensation last month because they had been left out of FSCS compensation.
This was because the scheme only covers regulated activities, like being given financial advice by LCF or transferring money from their Isa, but not the actual buying of unregulated mini-bonds.
The Economic Secretary to the Treasury, John Glen, said today: ‘This has been a very difficult time for LCF bondholders, many of whom are elderly and have lost their hard-earned savings.
‘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 Financial Services Compensation Scheme.
‘However, the situation regarding LCF is unique and exceptional and the government has decided to establish a compensation scheme for LCF bondholders in this instance.
‘The scheme 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.’
The Treasury says the FSCS is strictly limited in scope and it is only able to pay out when a relevant regulated activity has been undertaken.
It has been able to protect around 2,800 bondholders, paying out over £57million in compensation, according to the Treasury.
It adds that around 97 per cent of all LCF bondholders invested less than £85,000 and therefore will not reach either the Treasury’s or the FSCS’s compensation cap.
The Treasury adds: ‘Bondholders should be vigilant to the risk of scammers posing as services to help them claim.
‘They do not need to do anything at this stage and government will provide further details on how the scheme will operate in due course.’
The FCA announced today that ‘given the exceptional circumstances’ it would make ‘ex gratia payments’ to a small number of investors, not already compensated by the FSCS, who contacted it about LCF between April 2014 and December 2018.
They were given incorrect information which may have led them to conclude their investment would be safer than it was, the FCA admits.
‘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,’ it said.
‘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.’
The regulator said that following the publication of Dame Elizabeth Gloster’s report into its regulation of LCF, it had acknowledged that the collapse has had ‘a significant impact on the lives of many individuals who invested money they could not afford to lose’.
‘We are very sorry for the errors we made in our handling of this case. We accepted, and have committed to implementing, each of the recommendations which Dame Elizabeth Gloster made for the FCA in her review.’
The FCA also said: ‘Together with the Serious Fraud Office, the FCA is continuing to investigate the circumstances surrounding the sale of mini-bonds issued by LCF.’
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