Shortly after the release of the Gloster report into the FCA’s failings over London Capital & Finance, the Treasury announced that it would announce a scheme to compensate London Capital & Finance bondholders… maybe.
Taking into account the various channels through which people affected can seek compensation, the government will… set up a scheme to assess whether there is a justification for further one-off compensation payments in certain circumstances for some LCF bondholders.
John Glen, Economic Secretary to the Treasury
“Various channels” is a reference to the essentially random basis on which the Government has paid out compensation to LCF investors so far.
Investors who have managed to secure compensation far include people who transferred stocks & shares ISAs to LCF, but not cash ISAs (because there were too many of the latter because of some random nonsense about “regulated investments” being different from “designated investments”). It also includes people who managed to persuade the FSCS that LCF gave them advice (despite not being a financial advice company, not being authorised to provide advice, and employing no financial advisers).
The LCF investors who were told by the Financial Conduct Authority’s call handlers that LCF was legit and FSCS-protected also appear to have a decent chance of being compensated individually by the FCA. Although the Gloster report mentions several cases, this is likely to be only a handful of LCF’s 11,600-odd.
The FSCS has paid out about £50 million so far, representing just over a fifth of the amount lost in LCF.
How much the Treasury’s new scheme will pay out is unclear. Based on what little has been announced so far, it could be anything from zero, if the Treasury decides enough has already been done (although that would make the Treasury’s announcement, and the raising of investor hopes, rather pointless), to full compensation along the lines of the FSCS, perhaps with a cap. More details are expected in the New Year.
If we assume the Treasury’s scheme isn’t pointless, then of the three options available to the Government to justify paying compensation I outlined in an article a year and a half ago, it appears that we are staggering towards a mish-mash of all three. (1. Compensation for bad advice, 2. Compensation on a novel re-interpretation of what the FSCS covers a la Providence Bonds and Secured Energy Bonds, and 3. An ad-hoc, one-off compensation scheme in recognition of regulatory failure.)
Whether compensation is paid by the FSCS, the FCA or the Treasury is of academic interest, as fundamentally the bill lands on the kitchen table of the general public either way. (The category of FSCS levy payers, i.e. anyone who uses financial services, is indistinguishable from the category of taxpayers, although IFAs and others who get billed by the FSCS personally will have a different perspective.)
Whether the Four Horsemen of LCF or the nine other executives sued by LCF’s administrators will be repaying any of the investors’ money is as yet unknown. The lawsuit was launched in September and there’s been little further news since.
Regardless of what legal justifications are found, fundamentally the rationale for bailing out LCF investors is the same old rule: if enough people believe that an investment is risk-free, the Government has to spend everyone else’s money to make it so. See also final salary pension schemes, Barlow Clowes, Equitable Life, IceSave, etc etc.
2021 may be the year that LCF joins that list, depending on how far the Treasury decides to go.
It’s hard to see what’s different about LC&F to the other 100 odd unregulated investments detailed on this web site, other than it being in the spotlight. When will the government finally do something to prevent schemes like this being set up in the first place?
@FraidKnot – I agree there is a huge problem in the UK of companies with no legitimate purpose being set up to sell own non-transferable bonds (in order to take advantage of the FCA’s interpretation of RAO and MIFID2 exemptions from being regulated) using fictional promotional materials to defraud people out of their savings. I guess the difference between LCF and the 100+ others is that the company was FCA authorised & went for it on an industrial scale.