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London Capital & Finance bondholders angry at having to fund 20% of losses in Treasury compensation scheme

Jim Armitage
·4-min read
<p>The FCA’s Megan Butler has apologised for regulator’s failure to protect LCF investors</p>

The FCA’s Megan Butler has apologised for regulator’s failure to protect LCF investors

Investors in the collapsed London Capital & Finance bond investment scheme will be paid £120 million in compensation by the taxpayer after the Financial Conduct Authority failed to protect them from being ripped off.

However, some bondholders were still angry because the Treasury scheme states they will still have to fund 20% of their losses in the collapsed scheme.

Given that the Treasury protects £85,000 of investors’ funds, that means investors will be able to recoup a maximum of £68,000.

According to the Treasury, that means 97% of LCF investors will get the full 80%.

However, that still leaves many of the 11,625 bondholders who invested more than £85,000 out of pocket.

LCF went bust after raising a total of £237 million and administrators have found many of its investments are worthless and often closely connected to associates of the directors.

One investor in his 80s said: “It’s a start, but it still leaves me short of more than half of what I invested.”

Another, Mahendra Bajaj, said: “From the point of view of us bondholders, it is deplorable that we have to pay 20% because the FCA did not supervise LCF properly. Why are we being penalised 20%?

“However,” he added, “It’s great news that we are moving towards a resolution.”

Others said it was a better outcome than they had expected and admitted that they had been aware that the government’s savings guarantee limit of £85,000 meant they would not get any more than that.

John Glen, the Treasury Secretary announcing the scheme said it was “fair” and balanced the interests of bondholders and taxpayers.

The Treasury scheme will not refund people who have already been paid out by the Financial Services Compensation Scheme. It has paid compensation to 2800 investors, totalling £57 million.

Glen said the government does not step in to pay compensation for failed financial firms outside the FSCS’s scope because that would create the wrong incentives and cost the taxpayer too much.

However, the situation of LCF he said “is unique and exceptional” because the FCA had wrongly given the firm its authorisation, creating a “halo effect” which encouraged thousands to invest.

The FCA also today said it would now consider making payments to victims who contacted the regulator about the firm and were given incorrect information that may have convinced them to invest in LCF, or remain invested because they were left concluding the firm was safer than it actually was.

The FCA said: “We are very sorry for the errors we made in our handling of this case.”

It added that it had accepted the recommendations of an independent review done by Dame Elizabeth Gloster which was excoriating in its criticisms of the watchdog.

“Together with the Serious Fraud Office, the FCA is continuing to investigate the circumstances surrounding the sale of minibonds issued by LCF,” the FCA said.

LCF told prospective bondholders it put their money into many SME businesses across the country. In fact, it put it all into a tiny handful, including the showjumping stables of an associate.

The scandal highlighted how the FCA was taking an overly restricted view of what it does and does not regulate. While LCF was a regulated firm, the bonds it sold were not. This state of affairs was confusing to most investors who assumed they were investing in an authorised product.

Treasury secretary Glen pointed out that LCF was accused by bondholders of using a range of dishonest tactics to persuade them to invest. “For example, some novice investors have said they were encouraged to declare themselves to be sophisticated and experienced, thereby enabling them to access products that should have been out of reach.”

He also highlighted how the company had adopted “flawed investment and marketing strategies and paid high commissions of up to 25% to the sales agent.”

This is a reference to Surge Group, the sales agent run by former policeman Paul Careless, who made many millions of pounds from his work selling bonds of LCF.

His Surge group also marketed other schemes that went on to collapse, losing investors their money, most notably Blackmore Bonds.

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