Retail bondholders facing the wipeout of their savings in a £236m investment scandal are accusing the UK’s financial compensation scheme of giving misleading information over the protection they should expect.
People who bought “mini-bonds” from London Capital & Finance have told the Financial Times that they only did so after receiving assurance from the Financial Services Compensation Scheme that their money was safe.
More than 11,500 bondholders — many of them retirees and first-time investors — may now be wiped out following LCF’s collapse in late January, which sparked a regulatory and criminal probe.
An FSCS spokesperson apologised for “the confusion” it may have caused for LCF customers, adding in a statement to the Financial Times: “We have been made aware of a small number of communications from FSCS which may have given a partial picture and we are seeking to establish the number and nature of their content.”
The FSCS, which refunds deposits and investments when things go wrong, has previously said it is not accepting claims related to LCF as the company was issuing “its own mini-bonds to investors on a non-advised basis”.
In one case, a pensioner greatly increased his investment in LCF’s mini-bonds, ploughing in £35,000 — up from an initial £6,000 — after receiving what he deemed to be reassurance last August from the FSCS.
While LCF held regulatory authorisation from the Financial Conduct Authority, which the company displayed prominently in marketing, mini-bonds are unregulated, which means they are not typically covered by the FSCS unless investors can show they bought the bonds following bad advice.
But correspondence seen by the FT shows that the FSCS did not spell out this nuance to some bondholders, and stated the company was protected by the guarantee scheme to the tune of £50,000.
An August 2018 email from the FSCS to the 72-year-old who invested £35,000 said simply: “London Capital & Finance Plc are authorised by the Financial Conduct Authority and therefore covered by the FSCS up to the compensation limit of £50,000.”
The retiree, who wished to remain anonymous, told the FT: “I feel I was most definitely misled. I thought hopefully they wouldn’t go bust, but even if they did I thought my capital was covered.”
The FSCS said in its statement: “While it is true to state that FSCS protection would cover regulated activities carried out by LCF, we accept these efforts to inform people may have led to confusion about the extent to which our protection extends to these particular mini-bonds.
“As part of our investigation we will examine each of the individual cases and respond to them directly,” it said. “We are sorry for the confusion this may have caused some LCF customers.”
LCF’s administrators at Smith & Williamson said the FSCS may have to reconsider its position in relation to individual bondholders who can show they received misleading communications from the guarantee scheme.
“Normally the FSCS is looking at advice from other people, but this puts the FSCS in a particularly difficult position with regards to that individual,” said Finbarr O’Connell at Smith & Williamson.
At a creditors’ meeting last week, around half a dozen bondholders claimed they had been given erroneous information by the FSCS.
One of the UK’s biggest scandals to hit retail investors in recent times, the collapse of LCF has highlighted the confusing thicket of rules around unregulated products.
LCF promised returns as high as 8 per cent through its mini-bonds, which in some cases it wrongly described as fixed-rate ISAs. Unlike listed retail bonds, mini-bonds are thinly traded and can carry a high risk because of the higher failure rates of small businesses.
The bonds ostensibly went to fund dozens of small businesses. LCF’s administrators revealed last month that in reality, it was a web of interlinked companies, with millions of pounds of bondholders’ money enriching LCF’s boss and the chairman of its biggest borrower, according to the report by Smith & Williamson.
Another bondholder, Ray Nair, who invested £20,000, says he did so only after calling the FSCS in 2017 and being told to “go ahead and invest” because LCF held FCA approvals.
A subsequent FSCS letter dated September 2017 to Mr Nair says LCF is “registered with the FCA so protected under our scheme” but adds that “for investment claims we must establish that your investment was mis-sold to you and that you have lost money as a result of the advice you were given”.
“There has been a failure of duty of care all around,” said Mr Nair, a volunteer with the NHS, who has twice complained in writing to the FSCS. “It’s clear we were misled.”
Even as recently as mid-January — two weeks before LCF collapsed and a fortnight after the FCA began its investigation — the information FSCS gave was not clear.
Mahendra Bajaj, an accountant and LCF bondholder from Reading, said he called the FSCS after reading about the FCA probe to check the status of his £53,000 investment.
“The guy I spoke to said he would have to check on the situation, and came back to say that the business was regulated and that I would be entitled to compensation up to £50k if it went into default.” He asked for this in writing and was sent a confirmatory email, seen by the FT.
Nicky Morgan, who chairs the House of Commons Treasury select committee, said: “If true, this would not have helped those who invested in LC&F to make a fully-informed decision. This could be an issue that the independent reviewer considers as part of the investigation that I have called for into the issues raised by the failure of LC&F.”
