LCF to cost legitimate finance industry and general public nearly £200 million?

Figures published by Money Marketing last week indicate that so far the FSCS has paid out £56.3 million to 2,878 investors in FCA-authorised Ponzi scheme London Capital and Finance.

At around £19,500 per investor, that’s pretty typical of the average total investment.

Apart from £2.7m for investors who transferred a stocks and shares ISA, the vast majority of that was paid for LCF giving misleading “advice”. Despite not being a financial advice firm, not being authorised to give financial advice, and employing no financial advisers, Financial Services Compensation Scheme levy payers, i.e. the general public, have been put on the hook on the basis of “I’d advise my own mother to invest in this” school of salesmanship.

864 investors have seen their claims on the basis of advice rejected (a quarter of the total).

That £56.3 million bill represents only a quarter of the total number of LCF investors. If this ratio of successful claims continues to hold true over the remaining 7,858 who have not yet received a response from the FSCS, that would cause the total bill to levy payers and the general public to reach £187 million. I’ll emphasise that this is a finger in the air calculation, and could be miles out if the FSCS has prioritised claims with more chance of success, for one reason or another.

Still, if that ends up being anywhere close to the final bill, you almost have to ask why the Government didn’t just bail out 100% of LCF investors, rather than arbitrarily excluding a relatively small number. By the time you’ve decided to compensate 75% of investors (with the potential for more if the Treasury decides to pay further ad-hoc compensation), any arguments about moral hazard have already been thrown out of the window.

LCF investors have complained regularly that the system used by the FSCS to assess claims is inadequate, frequently rejecting claims initially and then upholding them if the investor has the gumption to appeal (i.e. the same system used by the DWP to keep the UK disability benefits bill down) and relying on gibberish machine-transcribed versions of recorded phone conversations.

As I’ve regularly predicted, we seem to be heading towards the worst of both worlds where neither LCF investors as a group nor FSCS-fee-payers are satisfied with the outcome.

Real reform of the UK’s securities legislation as a quid-pro-quo for a fair and consistent (but not necessarily 100%) bailout of LCF investors would at least have salved the pain to FSCS levy-payers, i.e. legitimate financial services businesses and the general public, who would be mollified by the fact that another London Capital and Finance couldn’t happen (at least not to the same extent). But as yet the Government seems to have gone with “let’s do the same thing over again and see if it has a different result”.