The hopes of most victims of FCA-authorised Ponzi scheme London Capital & Finance were dashed last week when the FSCS announced it would not compensate them on the basis of having received misleading advice.
It said that investors had merely been given incorrect information, which doesn’t generate a liability that is covered by the FSCS’ “protected business” rules.
That the FSCS has eventually taken this decision is disappointing for investors but ultimately not surprising. London Capital Finance was not authorised to give advice to retail investors, employed no qualified financial advisers, and its call centre staff were generally trained to avoid crossing the line from information to advice – as in any other non-advisory finance company. (Although some went off-piste and crossed the line into the “I’d tell my own mother to invest in this” school of advice.)
The surprising part is that the idea was floated by the FSCS and allowed to give false hope to tens of thousands for months.
That a suggestion that investors might be compensated on the basis of bad advice was even contemplated says a lot about how the industry and the public have been conditioned to accept the idea that the general public is liable for the losses of investors in high-profile scandals.
The unwritten rule in force in the UK is that if enough people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle resulted in the bailout of defined benefit pension schemes, Equitable Life, Barlow Clowes, IceSave and Northern Rock.
London Capital and Finance has not yet crossed that threshold but investors are unlikely to give up here.
Stocks & shares ISA investors compensated
A sliver of LCF investors – 159 in total – will be compensated by the FSCS due to the fact that they transferred stocks & shares ISAs to London Capital & Finance. LCF claimed to offer ISAs but in reality their ISAs were invalid as the LCF bonds they invested in were non-transferable.
Those who transferred cash ISAs to LCF are however not eligible for compensation.
The fact that stocks and shares ISA investors get bailed out but those who transferred cash ISAs don’t merely highlights the arbitrariness of the FSCS’ decision.
Why the grounds on which stocks & shares ISA investors get compensated don’t apply to cash ISA investors is something I’m struggling to understand. I can only imagine it has something to do with the fact that advising on cash ISAs is not a regulated activity whereas advising on stocks & shares ISAs each, but LCF didn’t give advice, so… anyway, if I don’t understand it you certainly can’t expect the average LCF investor to.
A financial compensation scheme needs to accomplish two aims: it needs to give the person in the street confidence to put their money into the regulated financial system instead of under the mattress, so it can be put to best use. And it needs to make sure they know that if they go outside the regulated financial system, they’re on their own, because the unregulated financial system tends to piss money down the drain unless investors know exactly what they’re doing.
At the moment the FSCS is failing at both.
As it enters 2020 the UK’s financial system is overseen by a leaderless FCA that refuses to enforce existing rules and backed by a compensation scheme that makes up the rules as it goes along. Still, it’s not like the UK should be particularly worried about investor confidence right now.
“Why the grounds on which stocks & shares ISA investors get compensated don’t apply to cash ISA investors is something I’m struggling to understand.”
Clearly there is some science to it, even if it’s not apparent to us mere mortals. My current assumption is that this cohort must have been advised to sell their existing investments, and it’s that disposal which triggers the compensation rather than the investment of the proceeds into LCF bonds. But that’s just an inductive theory based on the reportage and my understanding of article 53 of the Regulated Activities Order..
Hi,
Brev, how can you go about and put information online but not understand why a stock and share client would be eligible for FSCS but not a cash ISA transfer?
You make it seem as though your an expert and all things financial services…clearly not?
You tell me champ.
Why thank you.
I’ve never claimed “im an expert and all things”, so that’s all you.
And he gives with one hand and takes with the other. This isn’t a Pick Up Artist blog, pal, either enlighten us as to why only “stock and share clients” are eligible or stop wasting everyone’s time.
The FSCS website says very clearly that compensation is (potentially) available:-
“for customers of authorised financial services firms….”
Not to compensate is therefore the correct decision. Anyone investing in an unregulated financial product should remember – caveat emptor.
Any anger over this decision should be directed at the FCA for (yet again) shutting the stable door after the horse has bolted….
London Capital & Finance was an authorised financial services firm.
Its bonds were unregulated and its ISAs turned out not to exist, but this is a distinction that only wonks who are in no danger of going near LCF understand.
The fact that a Ponzi scheme can be an operation for two years, get FCA authorisation, and carry on as a regulated firm offering an unregulated Ponzi scheme to the public for another three years, until it eventually shuts down after an investigation into its ads, illustrates the absurdity of the UK Government refusing to bring financial regulation out of the 1920s by regulating all securities offered to the public.
Surely, if people were really interested in the answer to why a “Stock & Share” client gets compensation but cash ISA clients do not would be to ask the FCA; easily done with an email…
However, bun fighting seems to be the preferred option….
Easy to ask the FCA but getting a response from them is another thing. If it’s not clear to the general public what is and isn’t protected and why, there is a fundamental investor confidence issue.
From what I can gather (not being an expert in any of this) from googling this issue, it seems that stocks & shares ISA’s are considered “investments” but a cash ISA is a “deposit” (like a bank or building society account). The former is compensated up to £50k where the latter is compensated up to £85k. However, the types of “failure” for the latter seem only to include when the “bank or building society” – ie deposit holder – goes bust.
I guess transferring your cash ISA to LC&F is not the same as a bank going “bust”.
That’s the only thing I can deduce from my own investigations in the matter. I am sure any “expert” readers of this blog could be more informative – but hey, it took less time to investigate than the effort displayed in the “bun fighting”.
Nope. Claims in respect of investments have been covered up to £85k since last April.
Nor is transferring your stocks & shares ISA to LCF.
Yeah, but I think you might be missing the point. The two ISA’s are not defined as the same and therefore I assume that the conditions under which claims can be made are different. The amount is irrelevant.
There clearly is a difference since one gets compensation in the LC&F case and one doesn’t.
So I got the £85k/£50k wrong. Big deal. That wasn’t the point.
Why not investigate further? Or not. Whatever.
At least I tried to find an answer instead of bun fighting ….
As I understand it the reason S&S ISA transfers are covered is because authorisation of investment transactions is a regulated activity
https://damn-lies-and-statistics.blogspot.com/2020/01/london-capital-finance-fscs-compensation.html
Great, Jimbo!
Finally someone has come up with an answer ….
Great blog!
It still makes no sense to me as when a stocks & shares ISA is transferred to LCF, the sale of the shares is processed by the stocks and shares ISA provider at the other end. Not LCF.
By the time the funds arrive in LCF’s hands they are in cash no matter what kind of ISA they came from.
I recognise the distinction. I do not recognise why it makes cash ISAs different to stocks & shares ISAs such that one gets compensation and one doesn’t. By the time the funds arrived in LCF’s hands for LCF to perform regulated activities on them, there was no quality that made funds that came from a cash ISA distinct from funds from a stocks & shares ISA.
(We can discount in-specie stock transfers as I don’t believe LCF facilitated those.)
The only people that seem to understand the distinction is the FSCS itself. Backing that up we have the argument that there must be something, even if we don’t know what it is, because the powers that be must know what they are doing.
As they have repeatedly demonstrated over Independent Portfolio Managers, unregulated investments within SIPPs, and other areas in which they first said one thing and then changed their mind, they don’t.
Brev,
Why are you arguing with people who are trying to add value to the thread?
I have a feeling this is a sore subject for you and I think you invested into LCF.
If not can you let us know what you have invested into yourself and what your background is so others know your aptitude and competence when they read your views.
I think it would certainly add value
Because I’m trying to break down the FSCS’ reasoning for awarding compensation to stocks and shares ISA transferers and not cash ISA transferers.
The FSCS’ attempted justification founders against the fact that once funds were in LCF’s hands, there was no material difference between former stocks and shares ISA funds and former cash ISA funds.
I recommend readers of this thread check Mark Taber’s Twitter feed – he tried the avenue of asking the FSCS directly and their response has been similarly unenlightening. Which is among the reasons I am not going to duplicate his effort. There are readers of this blog who have a high level of knowledge of financial regulation so there is a decent chance that if I’ve missed something, they’ll point it out.
The FSCS pointed out to Taber on Twitter that stocks and shares ISAs are a “designated investment” and cash ISA funds are not, only a “regulated product”. This is however not an explanation, this is a statement of random facts about ISAs in the hope that it will be mistaken for an explanation. This distinction has vanished by the time the funds entered LCF’s hands for LCF to perform regulated activities on them.
So far the only logic-based justification we have for the idea that the FSCS are justified in awarding compensation on this basis is “the powers that be must know what they are doing” which ignores the history of financial regulation in the UK including IPM, unregulated investments in SIPPs and others.
If readers don’t like me pressing this point because they would rather believe the powers that be know what they are doing, I would suggest reading something else.
Remember that the FSCS kicked this entire thing off when they invented, out of whole cloth, the idea that FSCS investors could be compensated in large numbers on the basis of misleading advice, despite LCF not being an advisory firm and employing no financial advisers.
If the FSCS had told investors months ago that minibonds weren’t regulated, and the FSCS wouldn’t be paying out, end of story, investors would have either given up or moved on to seeking compensation by political channels (as with Equitable Life) and we wouldn’t be having this conversation.
But the FSCS has decided to invent novel, unprecedented reasons for paying compensation and because they are unprecedented those reasons are going to be scrutinised from first principles.
Sure, that’s why the very first article on this blog in December 2017, a full year before its collapse, was a warning about the risks of investing in LCF, the risks that LCF were failing to make clear to investors.
Even if I had invested in LCF it wouldn’t change any of the facts.
People can judge my aptitude based on the facts. Trusting authority over facts is how people get sucked into Ponzi schemes.
@Mark
“Why are you arguing with people who are trying to add value to the thread?” – are you seriously saying people aren’t allowed to disagree with anything posted on this thread? Even if it is wrong?
Brev has correctly identified an FSCS inconsistency.
Brev and fraid knot
You are one and the same person. Your mask has been removed.
It’s sad to see but you are the same poster.
I categorically reject that accusation.
I categorically reject that accusation.
Lol I’ve only just seen this. Brev you are wicked!