Financial Services Compensation Scheme  

LCF investors drop appeal against FSCS

LCF investors drop appeal against FSCS

A group of LCF minibond investors have withdrawn their judicial review against the Financial Services Compensation Scheme (FSCS).

According to a post on the FSCS website, published yesterday (August 23), the claimants filed an appeal after the lifeboat scheme won the first stage of the judicial review back in March, however they have since withdrawn the appeal, bringing the legal challenge against FSCS to a close.

This move will not change any of the FSCS’s decisions on LCF claims.

The claimants had brought a case to judicial review in an attempt to reverse the FSCS’s stance that the majority of bondholders are not entitled to compensation following the LCF collapse.

Before it entered administration in January, LCF raised in excess of £237m from more than 11,500 investors over the course of two years, and it has been embroiled in a scandal since. 

The issue of compensation from the FSCS has been a matter of debate as mini-bonds are unregulated investments and therefore not protected by the scheme. 

The claimants’ argument had been that, as a matter of law, bonds are transferrable securities and that LCF had engaged in a regulated activity by agreeing to deal them (even if the bonds themselves were not transferable).

In his ruling, Justice Bourne pointed to brochures of the mini-bonds which clearly stated these were non-transferable securities. This documentation also clearly stated the bonds were not subject to FCA authorisation or FSCS compensation. 

The judge was sympathetic with the claimants’ situation but nevertheless found in the FSCS’s favour, ruling the mini-bonds still fell beyond eligibility of compensation from the organisation.

Back in April, the government set up a compensation scheme for LCF victims through which it will reimburse individual bondholders up to £68,000. 

The government-funded scheme is available to all LCF bondholders who have not already received compensation from the FSCS and represents 80 per cent of the compensation they would have received had they been eligible for FSCS protection.

On the same day, the Financial Conduct Authority said it would pay compensation to a small number of LCF investors who complained about the regulator’s handling of their case.

It followed a report by Dame Elizabeth Gloster published in December which warned the FCA had shown "significant gaps and weaknesses" in its policies and practices ahead of LCF's collapse.

The investigation also found the regulator could have done more to protect investors in LCF and its handling of information from third parties regarding the business was "wholly deficient".

The FCA said it was “very sorry for the errors we made in our handling of this case” and that it was committed to implementing each of the recommendations Dame Gloster made in her review.

In June, the Treasury committee labelled the Financial Conduct Authority’s handling of London Capital and Finance “one of the largest conduct regulatory failures in decades” and urged the FCA to implement a change in culture to protect consumers and financial markets.