Last week we noted the FSCS’ reheated announcement that it would consider compensation claims by investors in London Capital and Finance if it deems they received advice from LCF’s marketing agent.
With the potential for some LCF investors to be compensated and not others, it seems a good time to have a review of the full range of options available to the Government to compensate LCF investors if it wants to, based on how it has done so in the case of other collapsed investment schemes.
Note: for the purpose of this article, the political fiction that the regulator is independent of the Government is ignored. The State is the State and taxpayers’ money is taxpayers’ money, even if it is collected via a levy on financial institutions which everybody uses rather than a tax which everybody pays.
Option 1. FSCS compensation for investors who received advice (the recently mooted option)
The rationale: Although LCF / Surge representatives were trained not to give advice, some of them nonetheless fell into statements which could be construed as advice, of the “I’d tell my own mother to invest in this” variety.
An investor who was advised by LCF to invest in LCF and consequently made a loss has a claim against them for bad advice, which (despite LCF not being authorised to give advice to retail investors) is covered by the FSCS now that LCF is in default.
The drawback: While this sounds great for any investor who can convince the FSCS they received advice, it will cover only a limited number of investors, as I described in my previous article. Moreover it has the potential to be inequitable as well as arbitrary. The investors who would be in line for compensation are more likely to be wealthy (thus meriting a personal visit from an LCF salesman as opposed to a chat with the call centre) and knowledgeable enough to make a case.
This basis can only cover all investors if the FSCS adopts the position that all of them received advice. Which in turn would mean that pretty much any investment company with a website about its products is providing advice and is FSCS-protected.
Option 2. FSCS compensation on the basis of “arranging investments” – aka the Independent Portfolio Managers option
The rationale: Independent Portfolio Managers was an obscure FCA-authorised company which produced the literature for two minibond investments – Secured Energy Bonds and Providence Bonds. Both collapsed after a few years. After some struggle, investors persuaded the FOS that Independent Portfolio Managers was liable to them in respect of “arranging (bringing about) deals in investments”, a protected claim which was covered by the FSCS.
The FSCS only began accepting claims against IPM last year but as far as we know, any investor in Providence or Secured Energy has a claim against IPM.
The drawback: IPM worked for Providence and Secured Energy as a third party. London Capital & Finance by contrast issued its own literature. It was an FCA-authorised company and did not need another one to sign off its promotions. The question is whether LCF can still be found liable on this basis in respect of its own bonds.
Law firm Shearman and Sterling think it can, a claim I have previously questioned.
So far the third party firm which authorised LCF’s promotions before it gained LCF authorisation, namely Sentient Capital London Limited, appears to have slid under the radar. Even if Sentient Capital London was to be found liable to LCF investors for the promotions it authorised, that would only apply to investors who invested at that time (i.e. before mid 2016).
Option 3. An ad-hoc compensation scheme – aka the Equitable Life option
The rationale: In the 1980s and 1990s the long-standing insurer Equitable Life rapidly grew its businesses by making guarantees to its policyholders that it couldn’t keep. The scheme collapsed in 1994; Equitable Life attempted to effectively renege on its guarantees by reducing the value of consumers’ policies, but this was eventually ruled unlawful in 2000. Unable to keep its promises and unable to renege on them, Equitable Life closed to new business.
Under the “With Profits” model popular at the time, Equitable Life investors’ money was not just managed by Equitable Life but to some extent invested in the insurer. Equitable Life’s hoovering up of investor money via promises it couldn’t keep led to significant losses for those customers.
After a series of government reports, the Parliamentary and Health Service Ombudsman found that the Government and the regulators had made a series of failures in not preventing the Equitable Life collapse, and that the taxpayer must foot the bill for a £1.5 billion compensation scheme set up for Equitable Life investors.
The problem: Essentially that this option – to compensate investors from the taxpayer’s purse on the basis of the repeated failings of the Financial Conduct Authority – is fully at the discretion of the Government.
Option 4. Pay no compensation at all – aka the usual option where Ponzi schemes are concerned
Most Ponzi scheme collapses result in no compensation for investors whatsoever, unless they paid for individual regulated advice from an FCA-authorised adviser (or, in recent years, invested via a SIPP without advice).
To pluck a name out of thin air, there has been no public pressure (or none that has registered in the media) to compensate investors in Essex and London Properties PLC, which was shut down in late 2018 after taking £11 – 20 million of investors’ money.
The crucial difference is not the fact that Essex & London did not use an FCA-authorised firm to approve its literature, but that it wasn’t as big as LCF.
A succession of retail investment scandals from Allied Steel to Equitable Life and IceSave illustrate that if enough people believe that an investment is risk-free, the Government has to spend everyone else’s money to make it so.
Whether this threshold will be reached with London Capital & Finance is yet to be seen.
Footnote: Where does the money that actually belonged to investors stand in all this?
Having spent a few pages talking about how the general populations’ money could be used to compensate investors (whether via tax or FSCS levies), people might ask why we aren’t talking about returning the money they actually invested.
Various amounts of London Capital & Finance investors money has been directed into the following:
- £60 million of commission paid to its marketing agent, Surge Financial
- The various investments detailed in the administrators’ report, such as Independent Oil & Gas, Prime Resort Development, magic software that predicts commodity prices, etc
- The personal possession or control of the Four Horsemen of LCF; Andy Thomson, Simon Hume-Kendall, Elten Barker and Spencer Joseph, as a result of LCF investment related transactions
- Sundry other costs and unknown destinations
The administrators have asked Surge to repay the profit it made from the commission payment. LCF’s various investments will at some point be realised by the administration.
As for the money which went into the personal possession of the Four Horsemen, the administrators asked them to pay it into escrow until LCF investors had received full payment. Hume-Kendall and Thomson have agreed to this, while as at March 2019 a response from the other two was pending. In addition, the Evening Standard has revealed that the Serious Fraud Office has put freezing orders on various properties owned by the Four.
Recoveries from any of these sources may take years if it happens at all.
If a compensation scheme of any variety pays out to LCF investors, it will take their place in the queue and become responsible for pursuing recoveries. The Government or the FSCS may be in a better position to ensure recoveries are maximised than lay investors. Or it may make no difference.