Financial Services Compensation Scheme 

FSCS urged to consider paying out on mini-bonds

FSCS urged to consider paying out on mini-bonds

The Financial Services Compensation Scheme has been asked to consider further proposals which suggest a collapsed mini-bond company carried out regulated activities and some bondholders should be entitled to compensation. 

Law firm Shearman & Sterling today (May 7) sent a letter to the FSCS asking it to consider whether London Capital & Finance carried out activities in two regulated areas, namely "dealing in investments as principal" and "operating a collective investment scheme". 

The FSCS cannot currently accept claims for compensation from 14,000 bondholders who invested in London Capital & Finance, as the act of issuing mini-bonds in the UK is not a regulated activity. 

But the scheme has previously suggested bondholders could be entitled to compensation if they can prove they had been advised to buy the bonds, leading administrators for London Capital & Finance to comb through recordings of phone calls between the company's representatives and its customers to find out whether they were given advice.

An FSCS representative had clarified that because the firm was FCA-authorised, it would not matter if it lacked the appropriate regulatory permission and if a particular regulated activity, such as advising, was actually carried out in practice compensation could potentially be offered. 

Shearman & Sterling is providing pro bono advice to some bondholders and met with the FSCS last week to discuss analysis which "supports the conclusion" the mini-bond company operated in further regulated activities, not just the provision of advice

In its letter Shearman & Sterling said the losses to a large number of private individuals who invested in London Capital & Finance had been "life changing", and investors had "rightly understood that the FSCS would stand behind their investments". 

The letter read: "LC&F therefore presents exactly the situation that FSCS was established by Parliament to address.

"...it is quite reasonable to regard investments in LC&F as taking place pursuant to 'regulated activities' for these purposes generically, particularly 'dealing in investments as principal' and 'operating a collective investment scheme'.

"We are of the view that FSCS would be acting lawfully and correctly in opening up the scheme to bondholders which fall within eligible personal categories on these bases." 

The FSCS has confirmed it met with Shearman & Sterling and FTAdviser understands the scheme will consider the latest arguments as part of its work to establish whether London Capital & Finance might have carried out regulated activities, for which it could compensate customers. 

London Capital & Finance went into administration at the end of January, putting the funds of more than 14,000 bondholders at risk.

Shortly before the collapse the Financial Conduct Authority had ordered London Capital & Finance to stop marketing its fixed-rate investment bonds and Isa products and the provider had its assets frozen by the regulator.

The FCA alleged the Tunbridge Wells-based firm had signed clients up to fixed-rate Isas promising 8 per cent interest, with investors' capital then invested into mini-bonds used to issue loans to small businesses.

rachel.addison@ft.com