A high court judge has ruled in favour of the Financial Services Compensation Scheme in a case brought against it by a group of LCF minibond investors.
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 FSCS has been able to pay out some compensation and as of February 2021 paid £56m to investors that had engaged with LCF via regulated activities such as arranging investments or advising on them.
The industry has borne the brunt of the fallout as the compensation scheme was forced to raise a supplementary levy to cover the cost.
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.
At several points in the bonds’ brochures, express terms detailed that the bonds were non-transferable. The claimants had identified these as unfair, something the judge agreed with.
In his ruling, Justice Bourne added: “I do not doubt that extending the scope of transferable securities would extend the scope of consumer/investor protection. It is disturbing that providers of financial products may be able to sidestep consumer protection by relying on spurious contract terms.”
The judge was sympathetic with the claimants’ situation but nevertheless found in the FSCS’s favour, ruling that the mini-bonds still fell beyond eligibility of compensation from the organisation.
Justice Bourne concluded: “It goes without saying that the claimants and their fellow investors deserve the greatest sympathy for the plight in which LCF left them. Nevertheless, despite the force, lucidity and skill with which their case was advanced before me, the claim must be dismissed.”
The FSCS has welcomed the ruling, saying: “FSCS is pleased that the court has reached a decision on the LCF judicial review, and that the court agreed with FSCS’s decision which involved some complex legal issues.
“We are still able to pay compensation to LCF bondholders who received regulated advice from LCF, and the compensation payments that FSCS has made so far are not affected by the court’s decision.
"We are continuing to look at LCF claims for misleading advice on a case-by-case basis and we’ll write to bondholders individually if we can pay compensation.”
The claimants in the case, represented by Shearman & Sterling LLP, intend to seek permission to appeal the decision.
Although disappointed, they were encouraged by the judge’s acknowledgment of elements of their argument.
A joint statement from bondholders Emmet Donegan, Joanne Ellis-Clarke, Alan Considine and Nathan Brown, read: “Whilst we are pleased with the court's conclusions on unfairness and unenforceability, we respectfully disagree with the judge’s further conclusion - that even if the non-transfer clauses were invalid and unenforceable, the LCF bonds are not also ‘transferable securities’ for regulatory purposes.
“We therefore intend to apply for permission to appeal the decision (provided we have adequate arrangements in place to ensure we would not have to pay the FSCS’s costs)."
The FSCS had agreed to cover its own cost of the initial trial even if successful.
The statement continued: "This decision to seek permission to appeal the judgment is made with mixed feelings – LCF investors have suffered for too long in their quest for redress – and we and our pro bono legal team have had to expend more effort and cost than we might have wished or expected on this case.
"However, whilst an appeal (if permission to appeal is granted) may prolong uncertainties, we believe that it is necessary and would have good prospects of success.”
Jon Yarker is a freelance reporter for FTAdviser
