HM Treasury plans to set up a compensation scheme for bondholders who suffered losses after investing in London Capital & Finance. Megan Butler of the Financial Conduct Authority has apologised for her organisation's handling of the matter.
LCF was a firm authorised by the Financial Conduct Authority which issued unregulated non-transferable debt securities, commonly known as ‘mini-bonds,’ to investors and then speculatively invested the funds received in a number of underlying businesses. LCF went into administration in January 2019 and at the point of failure 11,625 bondholders had invested around £237 million.
LCF’s business model was highly unusual, both in its scale and structure. Moreover, the FCA authorised it despite the fact that it generated no income from regulated activities. This allowed LCF’s unregulated activity of selling mini-bonds to benefit from the ‘halo effect’ of being issued by an authorised firm, helping LCF to look respectable and grow to an unprecedented scale before it failed, resulting in losses for thousands of bondholders.
The British taxpayer is funding most, but not all, of the compensation. Around 97% of all LCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the government scheme or the Financial Services Compensation Scheme (the compensation scheme for customers of failed financial services firms in the UK. HM Government expects to pay out around £120 million in compensation in total and the scheme to have paid all bondholders within 6 months of securing the necessary primary legislation, which it will frame in due course.
The Government never steps in to pay compensation in respect of failed financial services firms that fall outside the FSCS, except in this case. This is no doubt because of the embarrassing shortcomings of its regulator in handling the affair, which the Serious Fraud Office is investigating. Meghan Butler, who was in charge of supervision at the FCA when the scandal happened, accepted responsibility before the Parliamentary Treasury Select Committee last month. She did, however, defend her decision not to resign.
Tim Fassam of PIMFA, the UK's Personal Investment Management and Financial Advice Association, has welcomed the Government's intention to consult interested parties about bringing the issuance of minibonds into the regulator's purview.