The Financial Services Compensation Scheme announced today that some London Capital & Finance investors may have claims which will be covered by the FSCS.
The FSCS has stated:
Following an extensive review of LCF’S business practices, we believe that Surge Financial Ltd, acting on behalf of LCF, provided a number of LCF clients with misleading advice. As this is a regulated activity, it means that FSCS protection would be triggered and that there may therefore be a number of customers with eligible claims for compensation.
The announcement was inevitably treated as breaking news, although in reality individual investors are in largely the same position as they have been for a number of weeks: that the FSCS may pay out for investors who were advised to invest in LCF (even though LCF was not authorised to advise retail investors and employed no qualified and practising advisers), but it will depend on investors being able to show that they did in fact get advice from LCF.
Back on 10 May the FSCS announced
The promotional materials that we’ve reviewed stated that the LCF mini-bonds were not FSCS protected. However, after a further review of LCF’s business practices, investment materials, and calls recorded with investors, FSCS is investigating whether regulated activities were carried out that might give rise to a claim.
This work and our legal analysis supports our view that LCF’s core activity of issuing their mini-bonds in the UK was not protected, but there are further issues that need examining. We’re focusing on whether there was any regulated advising, arranging or other activities that may trigger our compensation. We also need to better understand the nature of the relationship between LCF and Surge Financial Ltd.
The FSCS also confirmed at this time that the fact that LCF was not authorised to give advice was not an issue, as far as compensation eligibility was concerned.
Which was already written into the rules, but still came as a surprise to many. Many legitimate advisers paying FSCS levies were under the impression that they paid levies to cover qualified and regulated advisers who, despite those barriers to entry, misled their clients and then did a runner; not any Tom Dick or Harry who acts “on behalf of” any regulated firm, even if they have no advice qualifications and are not authorised to give advice. But they were wrong so here we are.
So for weeks we have already known that an investor who received bad advice from LCF and would be owed redress on that basis would be covered by the FSCS.
All that has happened with the latest announcement is that the FSCS has moved from saying that some people may have been given advice to some people were given advice.
Far from salvation
For the bulk of LCF investors this is very far from salvation as they don’t yet know whether “some people” includes them. It is still unclear whether the FSCS will assume that all LCF investors received advice, or whether it will require specific evidence from the investor.
At the moment, with the FSCS asking investors to fill in another questionnaire which asks investors whether they received advice (and which explains the difference between information and advice), it looks like the latter.
By contrast, in recent other cases where investors in unregulated investments were compensated due to the failings of an FCA-authorised firm, namely Independent Portfolio Managers, compensation was granted on grounds which covered all investors.
Unless the FSCS takes the borderline absurdist view that all LCF investors received advice from a non-advisory firm with no advisers, granting compensation on this basis is highly likely to be inconsistent and inequitable.
Recall that for the biggest clients, London Capital & Finance sent salesmen round to their homes, such as John Russell-Murphy, to sweet-talk them into investing. For these high-roller clients it is already known that they received (illegal and unqualified) advice, of the “I’d tell my own mother to invest in this” variety.
Compensating on the basis of advice means that a high-rolling LCF investor who had enough moolah to merit a personal visit from John Russell-Murphy could get compensated, whereas a poorer investor couldn’t.
The idea that someone who lost more money is more worthy of compensation is economically illiterate. The pain of financial loss depends not on how much money you lost but how much of your money you lost.
Elsewhere, an LCF investor who dealt with LCF entirely online may not be compensated as they have no claim that they received advice, whereas an LCF investor who rang LCF up could. As it’s questionable how good LCF and Surge were at retaining phone recordings for training, monitoring and future investor bail-out purposes, it could even come down to an investor’s word as to whether they received advice over the phone or not.
Assuming that the FSCS does require some actual evidence of advice being given before compensation, this is a solution that might draw the sting out of the investor action groups. As the investors with the most money and the most wherewithal to make a convincing case qualify for compensation, while those who can’t make a case are left to twist in the wind.
More like “divide and conquer” than “justice for LCF bondholders”.