Financial Services Compensation Scheme  

FSCS finds 'misleading advice' in mini-bond investigation

FSCS finds 'misleading advice' in mini-bond investigation

The Financial Services Compensation Scheme has concluded that misleading advice was given to the customers of a collapsed mini-bond provider.

In an update published today (June 28), the lifeboat scheme revealed it believed Surge Financial Ltd, acting on behalf of London Capital & Finance, had provided a number of clients with misleading advice.

As advising is a regulating activity, the FSCS believes there may be customers with eligible claims for compensation - despite the fact LCF was not regulated to provide this service.

LCF fell into administration at the end of January, putting the funds of more than 14,000 bondholders at risk.

The FSCS has previously said it will not accept claims from investors in LCF because mini-bonds are unregulated investments and therefore not protected by the compensation scheme.

But in April the scheme confirmed it may be able to pay compensation to investors if the mini-bond provider was found to have provided advice, despite the fact it was not regulated to do so.

This is because if advice was actually provided in practice, the company would owe a customer a civil liability in connection with that activity.

While today’s announcement confirms the scheme found evidence that advice was given, the FSCS said further investigations would be needed to establish the exact nature of this advising and how many customers this would impact.

It also stressed it currently did not have access to all the information needed to determine the nature and extent of this misleading advice and stressed it was still working with relevant parties to gain access to this data.

The FSCS could also not confirm the compensation amount or what the impact on levy-payers will be. 

A pre-application questionnaire has been launched on the scheme’s website for investors to help the scheme build a better picture of this advising.

The FSCS hopes this information will help it better understand investors’ circumstances and therefore the number of customers impacted.

An FSCS spokesperson said: "Throughout our investigation into LCF, we have been as transparent as possible so that both LCF investors and our levy payers know where they stand. 

“Having established that there are customers who were given misleading advice and therefore may be eligible for compensation, we now need to determine the full extent of this advising activity.”

The FSCS expects the questionnaire stage of the process to take a number of months but stressed it would come to a decision as quickly as possible.

Shortly before the collapse of LCF, the Financial Conduct Authority ordered the company 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.