Financial Services Compensation Scheme  

Minibonds to cost FSCS millions

Minibonds to cost FSCS millions

The collapse of mini-bond provider London Capital and Finance could cost the UK’s compensation scheme more than £3m as it agreed to compensate a number of consumers affected by the fallout. 

The Financial Services Compensation Scheme told FTAdviser the total value of the 159 bonds confirmed as covered by the scheme this morning (January 9) was £3.1m.

Claims regarding potentially misleading advice are yet to be reviewed by the lifeboat scheme so the end payout could total more, although the FSCS said it expected many customers would not be eligible for compensation on an advice basis.

The FSCS pays compensation up to a limit of £85,000, so bondholders with investments exceeding this amount will still lose money.

Today’s announcement also confirmed there were 283 bondholders, who had dealt with the firm before it was authorised, who would not be covered by the scheme.

The FSCS has been investigating whether LCF bondholders have a right to compensation since the company went into administration at the end of January last year, putting the £237m invested by about 11,600 bondholders at risk.

It had previously stated it would not accept claims from investors in LCF because mini-bonds were unregulated investments and therefore not protected by the compensation scheme. 

But in April the scheme confirmed it was potentially able to pay out if the mini-bond provider was found to have provided advice — despite the fact it was not regulated to do so — and in June concluded that misleading advice had been given to customers of the collapsed firm.

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.

The City-watchdog has since introduced a temporary ban (until the end of 2020) on the marketing of mini-bonds to retail investors after finding the risk to consumers was sufficiently “serious and immediate” to justify intervention without consultation.

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