Financial Services Compensation Scheme  

Mini-bond compensation likely to hit advisers

Mini-bond compensation likely to hit advisers

Funding for claims against collapsed mini-bond provider London Capital & Finance will most likely be levied on intermediaries, the Financial Services Compensation Scheme has stated.

Last week the lifeboat scheme confirmed it had found evidence of misleading advice given to customers of the mini-bond provider, which fell into administration in January owing more than £230m and putting the funds of some 14,000 bondholders at risk.

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

The lifeboat scheme is encouraging investors to complete a pre-application questionnaire on its website as a means to collecting further information on the advice it believes was given. 

LCF 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.

Shortly before its collapse 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.

Speaking at a Treasury committee evidence session yesterday (July 3) Jimmy Barber, chief operating officer at the FSCS, said any successful claims for compensation against LCF would be levied against the FSCS' "investments" pool. 

The FSCS has since confirmed that whilst this answer is not definitive, it means LCF compensation will most likely be levied against the life distribution, pensions and investment intermediaries funding class.  

Each funding class under the FSCS has a limit on the amount which can be levied on it in a year, and in April the lifeboat scheme announced a £153m levy for the life distribution, pensions and investment intermediaries for 2019/20

This final levy was £22m less than originally predicted for the class in the scheme's January plan and budget, down from £175m. 

If the levy on a particular funding class exceeds its limit the excess is levied more widely on the other classes as part of the retail pool, which is contributed to by all FCA funding classes. 

The FSCS had 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.

Also speaking at the Treasury committee hearing Caroline Rainbird, the recently appointed chief executive at the FSCS, said: "We need more information to understand what has been going on.

"As I'm sure you can imagine it's complex and complicated but we need to make sure we need to make sure we do the right thing for both potential claimants and also to make sure that we are effective with our levy payers as well." 

Ms Rainbird said there had been a "significant" uplift in the number of LCF customers providing more information to the FSCS since it announced last Friday (June 28) evidence of misleading advice had been found.