RegulationAug 29 2019

Mini-bond investors continue bid for FSCS payouts

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Mini-bond investors continue bid for FSCS payouts

The lawyers acting on behalf of investors affected by the failure of London Capital & Finance have followed up on actions to encourage the Financial Services Compensation Scheme to pay out.

According to Shearman & Sterling, the FSCS has indicated it will only accept claims from the investors who were mis-sold through personal telephone calls or emails from LCF or its marketing partner Surge Financial.

Last month the FSCS said it had found evidence that misleading advice was provided to a number of LCF clients after combing through phone recordings.

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

But Shearman & Sterling has argued that many of the investors affected bought Isas and other investment products online as a result of LCF being actively marketed on price comparison websites and appearing high up on search engine results for “best Isa”.

Thomas Donegan, a partner at Shearman & Sterling, said: "LCF bonds would have appeared to retail investors to be a standard Isa product and were marketed in a way similar to those issued by major banks and building societies. 

“Investors have been disappointed about the unsympathetic actions of financial regulators to date."

He added: “In purporting to void LCF investments as Isa products retrospectively and promulgate regulatory interpretations that would deny compensation for investors, HMRC, the FCA and the FSCS have taken a stance whereby the purported non-transferability of LCF instruments is given precedence over the fundamental features of the Isa products being sold to retail investors. This is incorrect as a legal matter."

Shearman & Sterling have claimed a key issue in determining compensation is whether the bonds issued were “transferable securities”.

Isa regulations state that bonds can form part of a portfolio for Isa accounts, but only if they are classed as transferable. LCF was an approved Isa manager by HMRC, the law firm has said.

Simon Letherman, a tax partner at Shearman & Sterling, added: “HMRC’s purported decisions penalise the victims of a financial scandal as if they were the bad actors. 

"They do not provide appropriate remedies as envisaged by the Isa regulations for the situation they find themselves in through no fault of their own.”

Shearman & Sterling has written to HMRC outlining these concerns and has also asked HM Treasury to introduce laws that protect the Isa entitlements of LCF investors. The Treasury has been approached for comment.

An HMRC spokesperson said: “HMRC is entirely sympathetic to the situation in which investors find themselves but must act in accordance with the Isa legislation laid down by parliament. Voiding an Isa is always a last resort used where it is not possible to repair the account and maintain the Isa wrapper.

“Any interest received by an investor in LCF’s bonds was not tax-exempt under the Isa rules, and therefore formed part of their taxable income.

"However, an investor is not liable for tax on the interest if it is covered by their tax-free personal allowance or their tax-free personal savings allowance.

"In light of this, HMRC is not actively checking LCF investors’ tax affairs. Any investor who is liable for tax on their LCF interest should notify HMRC.”

LCF fell into administration earlier this year and 12,000 retail investors are reported to have lost more than £200m.

This, along with potential regulatory failures connected with the firm, are currently under investigation.