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Most London Capital & Finance investors will get no compensation

Service Area: Criminal and Regulatory, Fraud

Member: Roger Isaacs

The majority of individuals who invested in London Capital and Finance’s (LCF) mini-bond scheme will get no compensation, according to the Financial Services Compensation Scheme (FSCS).

The FSCS has delivered its verdict on whether LCF investors are eligible for compensation after the investment scheme collapsed at the start of last year.

Almost 12,000 people, many of them first-time investors, put £236 million into the firm. Unfortunately for investors, the outcome of the FSCS review was that fewer than half of them qualified for compensation.

Early last year, the FSCS, a state-backed entity aimed at protecting consumers if UK-regulated firms collapsed, said it would investigate whether or not people might be refunded.

However, it concluded that most investors in the firm were given “incorrect information”, not misleading advice and therefore did not qualify for compensation. This will no doubt seem like an unfair, artificial and arbitrary distinction for those adversely affected by the ruling. It may be technically correct but many will consider it to be at odds with the principles of protecting consumers on which the FSCS was founded.

The collapse of LCF is still being investigated by the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO).

To date, the FCA has obtained tens of thousands of documents and is undertaking a thorough and forensic review of these files.

LCF’s mini-bonds were considered a high-risk investment but were marketed to less-sophisticated investors, such as beneficiaries of inheritances, small business owners or early-retired people.

The firm promised greater security by claiming to spread funds from the sale of mini-bonds between hundreds of companies but the fund was instead invested in just 12 companies, 10 of which were described as “not independent” of LCF.

In fact, the firm’s administrators found that there had been many “highly suspicious transactions” involving a “small group of connected people”, which led to large sums of investors’ money allegedly ending up in their “personal possession or control”.

Roger Isaacs, Forensic Partner at Milsted Langdon who has commented publicly about LCF on BBC Radio Four’s Money Box programme, said: “When transactions are being carried out via such a highly complex web of companies, the forensic investigation is equally difficult and it is likely to be some time until this matter is fully concluded by the FCA and SFO.

“The decision by the FSCS will be a heavy blow for those investors that are not compensated and many will likely be awaiting the outcome of these investigations to see whether LCF acted unlawfully and whether any funds can be recovered. The administrators’ initial comments are however far from promising and the outlook appears to be bleak”

Author: Roger Isaacs
13 January 2020